What Happens to My Tax Refund if I Default on My FHA Loan?

The Federal Housing Administration (FHA) offers loan guarantees to qualified borrowers. With this program in place, a borrower can take a private mortgage loan, and the FHA will essentially "insure" the debt, bringing many benefits to the borrower. However, if the borrower defaults, he or she will owe money not just to a private lender but also to the federal government. In this case, the government may use its Federal Tax Refund Offset (TRO) Program to withhold tax refunds and repay the debt.

Federal Tax Refund Offset (TRO) Program

This program allows the federal government to withhold all or part of a tax refund from any individual in default of a federal debt, which is not the first attempt the government will make to collect from you; generally speaking, all other forms of debt collection should be tried prior to initiating this program. You must owe at least $100 on your mortgage, and you must be at least 90 days late for the government to withhold your refund. If the government pursues this option, you will receive a notice of the intent to withhold your refund at least 65 days in advance.

Amount Withheld

The Department of Treasury's Financial Management Services division can withhold your entire refund if you owe a balance equal to or greater to that refund; there is no limit on this provision. If your refund is less than the amount you owe, the FMS will continue to reduce future refunds or payments accordingly until the amount has been paid off or otherwise settled by independent collections efforts.

Exceptions

Not all FHA debts will be withheld from a tax refund. You will be excused if you have filed for bankruptcy protection, are otherwise in negotiations to repay the debt, are currently having your wages garnished by the government, are currently in a repayment agreement, have legally disputed the debt or have reported the debt on form 1099G, government repayments.

Avoiding the Penalty

If you would like to receive your federal refund without any deductions but know you owe the FHA, contact the FHA to put a repayment plan in place. As long as you are meeting the terms of your repayment plan, the FHA will not withhold your tax return.