Unfortunately, a full or partial government shutdown impacts federal employees and many more. Additionally, the shutdown creates mortgage process delays for homeowners, buyers, and sellers. Even though borrowers work directly with mortgage lenders, brokers, or banks, the federal government is still involved in mortgage lending. The significance of the mortgage delay depends on the shutdown length, loan type, borrower scenario, and lender threshold for risk. Depending on these factors, the delay may vary widely. Some scenarios may experience no delays.
Meeting a purchase contract closing date is key. Often, every day is important during the home selling process, and a government-created delay may jeopardize the closing date. It affects moving trucks, employee relocation, closing schedules, and much more. So, buyers, sellers, real estate agents, or anyone else directly or indirectly involved in the home buying or refinancing process must understand the details. At least make a phone call now to your lender to discuss potential closing roadblocks. Below we explain services and programs affected by government shutdowns.
Government Shutdown Affected Lender Services
Throughout the history of lending, fraud is a reality. So, lenders must verify areas such as borrower identity, income, and other areas. When tax returns are involved, lenders need to verify the income accuracy directly with the IRS. Reason being, the tax return itself is easy to modify. The following are normal lending procedures when tax returns are involved.
Self Employed Income Verification Shutdown Delays
Self-employed and potentially other borrower types have an additional step in the mortgage process. Income verification normally involves a borrower providing a pay stub, W2, and/or tax returns. Although, income calculations which involve tax returns usually require lenders to verify the accuracy of the borrower provided documentation. This is accomplished by lenders requesting a copy of the tax return transcripts from the IRS. This is not deemed essential to keeping the government running. Therefore, the government shutdown prevents lenders from obtaining this IRS income verification.
Often, lenders will not close a mortgage loan without the transcripts verifying the borrower provided tax returns. But, there are times where some lenders allow closing and will verify the income after closing. In many cases, OVM Financial will close loans that traditionally require tax return transcripts. Of course, once the IRS is back online. Certainly, borrowers with a self-employed, commission, rental, or other income types which require tax return verification should immediately speak to their lender.
Government Shutdown Effect on Home Loan Programs
Over 2017 – 2018, there have been three government shutdowns of the 21 total shutdowns since 1976. Traditionally, government shutdowns only last a few days, but the longest shutdown lasted a full three weeks, and the shortest was 9 hours. Full or partial shutdowns result from political disagreements in meeting annual appropriations funding. Regretfully, when there is a stalemate, federal employees and many others suffer. Thankfully, most lending agencies do not experience delays of any significance. Although, not all agencies and not all lender services!
Government Shutdown Prevents Flood Insurance Coverage
Buying a property in a flood zone hazard area will always require flood insurance. At least when a mortgage is involved. Closing on a property within a flood zone requires the following:
- In-force flood insurance policy
- Sufficient coverage
- Appropriate dates of coverage on or before December 21, 2018
In cases where flood insurance does not meet the above, the buyer must wait until the shutdown is over and a sufficient flood insurance binder is provided.
Government Shutdown Impact on Federal Housing Administration
Although FHA is a federal lending agency, traditionally most loans do not experience negative repercussions resulting from a shutdown. Thus, lenders normally continue providing FHA insured home loans to borrowers. Although, during these periods staff are often reduced. Here are examples where loans could experience delays. Sometimes underwriters need to consult with FHA for a guideline or scenario clarification. Also, some loans require assessment by an FHA staff underwriter. The FHA staff will not be able to process new condo project approvals under the HUD Review and Approval Process.
Foremost, buyers or refinancing homeowners should not be negatively affected by a shutdown.
USDA Rural Development Delays From Shutdown
USDA is not a stranger to government delays. Each year on October 1, the USDA fiscal year starts over. Consequently, USDA usually runs out of funds available to guarantee lenders. The result is most lenders pause USDA loan closings until funds are available. Typically, about a two-week delay. Historically, OVM Financial has continued to close USDA Rural Development loans for buyers. Learn how to protect a USDA purchase each year.
During a government shutdown, USDA Rural Development will not issue any NEW conditional commitments. Above, USDA issues conditional commitments with unavailable funds and lenders make a choice to close the loan. In the case of a government shutdown and no conditional commitment, lenders should not close a USDA loan. Although, loans with an unexpired USDA conditional commitment may close if a lender chooses to. OVM Financial will close loans in this case for buyers.
Final Verification of Employment
Before closing a mortgage loan, lenders perform a final, verbal verification of employment. This process ensures the borrower has not changed employment since the prior verification. This is important since income is a significant requirement for borrowing money. In the case of government workers affected by the shutdown, lenders usually require verification the employee is back to work before closing.
Government Shutdown Impact on VA Loans
Often in the case of a shutdown, the VA loan program is not affected negatively. Lenders are typically able to continue providing VA loans like normal. Although, in some shutdowns, VA personnel may be limited. Loans in need of special attention or review may be delayed. In the case of the current partial shutdown, the VA Loan Guaranty Program is fully operational.
Hopefully, our future does not include more government shutdowns. Although with the widening gap between political sides, these situations should continue. Often, the results are the so-called “kicking the can down the road” scenario. Of course, borrowers and sellers have no control over this shutdown process. The knowledge provided in this article plus communicating often with your lender; it is easier to navigate this process.
Questions About the How Mortgages Are Affected by the Shutdown?
Contact an OVM Financial loan officer now.