What exactly is the affect of a government shutdown on real estate? As long as it doesn’t drag on, the most significant impact is the postponement or slowing of the origination of some mortgages and real estate loans.
This is important because most real estate closings involve a buyer aquiring a loan. If the loan doesn’t fund, the deal doesn’t close and that’s bad news for everyone involved. The following details which loans are affected and how that will impact you, so that you can be prepared.
#1. How a Government Shutdown Affects Conventional Mortgages
A conventional mortgage is a loan that when originated will be sold on the secondary mortgage market, primarily to organizations like Fannie Mae or Freddie Mac. Like real estate investors, most banks and mortgage companies are in the flipping business too. They originate the loan, package it up and ensure all the guidelines are set. Then they flip it as soon as they originate it. In order to be sold on the secondary mortgage market, conventional mortgages have their own set of rules that must be adhered to.
Regulations for Conventional Mortgages that the Government Plays a Key Role In:
1. Form 4506-T: The underwriter is going to request these tax transcripts directly from the IRS. They will verify the tax returns that you provide as a borrower when you submit your loan application. They do this by looking at what the IRS has in their transcripts. The IRS is reduced to a skeleton crew when the government shuts down, therefore getting these transcripts can take longer.
2. Federal Verification of the Social Security Number: The loan provider will also request confirmation of the borrower’s Social Security Number from the Social Security Administration. During a shutdown they are on skeleton crew as well. As a result, either this takes longer, or they just don’t get confirmation.
How Does this Affect Getting a Loan?
Without the government documentation the loan doesn’t get originated. The majority of all the loans that are originated are conventional, so this will impact most of you if you’re in the middle of a deal. That said, if it’s a short-term government shutdown, often the lender will originate the loan anyway. However, they can’t sell it on the conventional mortgage market until they receive these two documents.
If the shut down continues, Fannie Mae or Freddie Mac might allow them to let it slide and get it later. In either case, at the very least this can delay things.
#2. How a Government Shutdown Affects Government-backed Loans
These loans are slightly different. With a government-backed loan, the same bank or mortgage company may be originating the loan, but they will get a guarantee from either VA, FHA, or USDA Rural.
- VA: During a shutdown the entire staff will be working fulltime because they are fiscally funded throughout 2019. If it’s a VA loan, there will be no delays.
- FHA: Up to 95% of the HUD employees are off in a government shutdown. However, single-family homes are put at the highest level of priority with the 5% of employees left. Therefore, it is possible to get FHA guarantees. The lender may also go ahead and originate the loan, counting on a guarantee later. However if your deal is a HELOC, reverse mortgage, or multi-family that’s not a high priority for them and most likely won’t get guaranteed.
- USDA Rural: They will not be giving guarantees during a government shutdown. It would risky for a lender to originate a loan without getting that guarantee. If you are in the process of selling a property to a buyer getting a USDA Rural loan, and the government shuts down, that might put it on hold until it starts up again.
#3. How a Government Shutdown Affects Flood Insurance
One more thing to consider is flood insurance. During a government shutdown, flood insurance policies will not be issued. There is a possible solution. You could try to assume the seller’s policy or even consider private insurance. I don’t have a lot of experience with private flood insurance. All of my flood insurance policies on properties I own are federal-backed flood policies.
In the short-term there might be some flexibility, especially if the money for the flood insurance policy is put into escrow at the time of closing. This doesn’t concern me as much because in most cases it’s not going to impact you.
A government shut down affects real estate mostly in relation to the origination of mortgages. This means that it might take a week or two longer for the deal to close and it may not close on schedule. That might be a concern for you, and I understand. However, you will need to be patient.
One solution to this problem is to have a lot of deals going. When you have multiple deals closing you are stockpiling cash all the time. In real estate there’s always something that could postpone the closing. With this method, no matter what the obstacle, it doesn’t get you down and disrupt your business.