Is a subordination agreement required if the borrower has an outstanding tax lien?

Tax liens may remain unpaid if:
•     the Borrower has entered into a valid repayment agreement with the lien holder to make regular payments on the debt; and
•     the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. 
•     Except for federal tax liens, the lien holder must subordinate the tax lien to the FHA-insured mortgage. 

The Lender must: 
•     include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio. 
•     check public records and credit information to verify that the Borrower is not presently delinquent on any Federal Debt and does not have a tax lien placed against their property for a debt owed to the federal government.
•     include documentation from the Internal Revenue Service (IRS) evidencing the repayment agreement and verification of payments made, if applicable. 

For additional information see Handbook 4000.1 Sections II.A.1.b.ii.(A)(12)-(13) available at: https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh


All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04893