As of midnight on October 1, the government is officially shut down. That means the U.S. government ran out of money and needs Congress to authorize new funds.
Nobody knows how long a shutdown might last. Often, the government closes for only a few days, and these events cause just minor inconveniences. But, in January 2019, one dragged on for 35 days. It was the longest in history — so far.
Yesterday afternoon, both parties' leaders in the Senate and House met at the White House to attempt to negotiate a last-minute compromise. But neither side was prepared to concede ground.
Now, the government will furlough hundreds of thousands of civil servants and shutter of all but essential government services.
Some of those services play necessary roles in the processing of mortgage applications. Read on to learn how such applications are likely to be affected.
Slower Loan Application Processing All Around
FHA Loans During a Shutdown
Those same hurdles facing conventional loans will dog FHA loans, too. But FHA applications will probably encounter even more problems. The National Association of Realtors® (NAR) suggests FHA's overseer, the Department of Housing and Urban Development (HUD) will operate as follows.
- Regular FHA loans can close
- Reverse mortgages and Title I loans could be disrupted
- Foreclosures and other processes after closing may cease (does not affect homebuyers with FHA applications in process)
- Condo project approvals will experience disruptions, potentially delaying some closings
- FHA closings that require national flood insurance program
- The FHA Resource Center is open, but with limited staffing. FHA underwriters rely on this department to answer complex scenario questions, so tougher loan files may be delayed.
So, most FHA applicants may not notice the shutdown. Others could be on hold until long after the government re-opens due to backlog.
VA Loans
The VA (U.S. Department of Veterans Affairs) plans to continue guaranteeing (providing insurance for) its loans during the shutdown. However, fewer staff will likely be handling necessary processes, and some support functions may be reduced or discontinued.
Lenders can still request a certificate of eligibility (COE) electronically. However, if you need a Form DD-214 to request the COE, you might need to wait until re-opening.
USDA Loans
Things are even worse for those applying for USDA loans, backed by the U.S. Department of Agriculture. The department is likely to cease issuing new mortgages and postpone closings on existing applications until the shutdown ends.
This is because, unlike FHA and VA loans, a government office needs to approve loan files prior to closing. These offices will be closed during the shutdown. When they re-open, expect large backlogs.
Of all homebuyers, those using USDA loans will be affected the most.
Conventional Loans
Loans from Fannie Mae and Freddie Mac will continue to be processed, since these loans don't rely on government offices, at least, not directly. Expect delays, though, since these agencies require
- 4506T tax transcripts
- Social security number verifications
- Proof of flood insurance if the property is in a flood zone
Flood Insurance
"Buyers who are purchasing homes in flood-prone regions are required to obtain flood insurance," says MarketWatch. The big problem, though, is that most flood insurance is offered by the government.
The National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency (FEMA), and from many private insurers. The NFIP and FEMA are government agencies and will be unable to issue new policies during a government shutdown. Existing policies should remain in force, and claims processed.
Of course, mortgage applicants can get coverage from the private sector. However, demand for these will likely increase during a prolonged shutdown, almost certainly slowing the issuance of new policies.
Furloughed Workers
If you're affected by furloughs, expect the lender to delay closing until you're back at work.
Most loan types require a verification of employment days before, or even the day of, funding.
Even if you could get an employment verification from the government during the shutdown, it would likely say you're furloughed. The lender likely can't close until the government re-opens.
What Applicants Can Do
There's really very little that an individual applicant can do beyond simply enduring the delays. Start conversations with your real estate agent, lender, and other parties involved if your closing will be delayed.
The silver lining is that a delayed closing is truly not your fault, and sellers are likely to work with you to extend closing.
