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How to Refinance Your Home with a Federal Tax Lien
Many people also believe that once the IRS files a tax lien against you, it is impossible to refinance your home. This is simply not true – it is just a matter of knowing the correct process.
When you own a home, anyone with a secured interest against it (your mortgage companies) hold priority on who has the first right to the value of the home. Your primary mortgage company is in line first. Your second mortgage company is in line second, and so forth. When the IRS files a Federal Tax Lien, they get in line behind everyone else.
The problem with a refinance is typically that you plan to pay off the first or second mortgage (or both), and the new mortgage company that is refinancing for you will now be in line behind the IRS. This obviously makes mortgage companies very nervous because that means that the IRS could foreclose on your home and the mortgage company could get nothing from the sale of your home.
What you need is a way for the IRS to agree to move to the back of the line behind the new mortgage company that is refinancing your home. This is done by requesting a Certificate of Subordination. Simply put, you are asking the IRS to subordinate themselves to the new lender – to move behind the new lender in priority.
The IRS will agree to do this as long as they are paid at the closing of the home their fair share of the proceeds of the refinance. Let’s say you have $25,000 of equity in your home, and a tax lien for $40,000. If you refinance and pull all of the $25,000 of equity out of the home, the entire amount will have to be paid to the IRS but you will still owe them another $15,000. Through the Certificate of Subordination, they will agree to move to the back of the line as long as they are paid this $25,000.
So you would refinance your home and give all of the money to the IRS. Why would you want to do this? For one, you’ll probably get a much better interest rate on a mortgage than you would through the IRS. You also can pay that money over 15 or 30 years through a mortgage – the IRS usually wants their money within five years.
Let’s say that you are stuck in an ARM loan and need to refinance for a better interest rate, but don’t actually have any equity. The IRS will also do a subordination to allow you to refinance, even if they do not get any money out of the closing. What you would need to prove to them is that by subordinating, it will ultimately make it easier to collect your tax bill. Normally the argument is that your monthly payments will decrease, allowing you to pay more each month towards your taxes.
Colonial Tax Consultants can assist you in preparing your request for a Certificate of Subordination. Call us today at (866) 573-3755 to find out how we can help you.