Background

• The FHA works as an insurance agency for mortgages. When it "guarantees" a loan, it promises to repay the mortgage lender if the borrower, you, defaults. This allows lenders to extend loans without asking for a large down payment or high income. However, the FHA assumes a lot of risk in the loan, so it chooses not to work with high-risk borrowers, such as those with damaged credit or federal tax liens.
  
  

Process

• When you apply for a mortgage, a lender may tell you an FHA mortgage will help your chances of securing the loan. At this point, you can apply with the FHA separately or directly through the lender. The FHA will consider your application based on the stability of your income and your history as a borrower. One of the first things the FHA will check is your status with the IRS. If you have failed to make payments on time, failed to file your taxes, or are currently under a tax lien, you may be disqualified from receiving the guarantee.
  
  

Options

• One option is to remove your federal tax lien before applying to an FHA loan. In general, once you fulfill the requirements of your lien, you will have a clean slate with the FHA. Another option is to obtain a mortgage without an FHA loan. This type of mortgage, called a "conventional" loan, may be more costly and harder to obtain. However, many mortgage lenders will still issue a loan even if you have a tax lien against you as long as you are not in default of payments on that lien.
  
  

Drawbacks

• Keep in mind, an FHA loan is not always the best option for every individual. If you qualify for a loan without the FHA's assistance, you may actually be better off than you would be with an FHA loan. Since the loans are insured by the federal government, they have longer processing periods and more restrictions, including low limits, than other private loans.