Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Refinancing with a tax lien

Dear Dr. Don,
Is it possible to refinance if you have a tax lien on your credit report? I currently have an interest rate of 7.375 percent and am four years into a 30-year loan with about $88,000 left on the loan and want to refinance.

I have a tax lien for approximately $10,500 that I am currently trying to negotiate an offer in compromise, but it doesn't look like that will be finished before interest rates go all the way back up. Is there any hope for me? My credit score is currently 706, which means I should be able to qualify for a lower rate if it makes sense to do so.
Jarla Jam

Dear Jarla,
It may be a small solace, but you've got a lot of other things going right financially if you have a credit score of 706 with a tax lien on your credit report.

If you can get the taxing body to subordinate the lien, you may be able to refinance your home. If it is a federal tax lien the IRS provides instructions on how to apply to have the lien subordinated. The following comes from Title 26 Section 6325(d)(2) of the U.S. Code:

Sec. 6325. -- Release of lien or discharge of property
(d) Subordination of lien
Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of subordination of any lien imposed by this chapter upon any part of the property subject to such lien if --
(1) there is paid over to the Secretary an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States,
(2) the Secretary believes that the amount realizable by the United States from the property to which the certificate relates, or from any other property subject to the lien, will ultimately be increased by reason of the issuance of such certificate and that the ultimate collection of the tax liability will be facilitated by such subordination, or
(3) in the case of any lien imposed by section 6324B, if the Secretary determines that the United States will be adequately secured after such subordination.

In trying to save thousands on your mortgage interest expense and your tax obligations, it doesn't make sense to skimp on professional advice. If you're working with a tax consultant on your offer-in-compromise then ask her about using tax lien subordination when refinancing your home.

-- Posted: Sept. 15, 2003