As the partial government shutdown extended into week No. 2 and the deadline looms for the extension of the debt ceiling, some Washington area home buyers and sellers are getting worried about the potential impact on their real estate transactions.
So far, while no specific delays have been reported by Redfin clients in the Washington area, many buyers and sellers have expressed anxiety, says Ellen Haberle, economist with Redfin real estate brokerage in Seattle.
“Some buyers have decided getting a loan closed right now is too tricky, so they’re stepping back temporarily,” Haberle said. “However, we’ve also heard that some furloughed federal workers are using their time off to search for homes since they assume they’ll get their back pay and that the shutdown will be over soon.”
Mortgage loan impact
Since the majority of mortgage loans are backed by the U.S. government, some borrowers have assumed that loans would not be approved during the shutdown. However, Scott Davis, senior loan officer with McLean Mortgage in Fairfax, says that only the Agriculture Department’s Rural Development loan program is completely closed.
“The FHA says they’re running with a smaller staff, so it’s possible that those loans will be delayed,” Davis said. “VA loans processing is a little slower than usual, so there could be delays there, too. Fannie Mae and Freddie Mac are open, so there shouldn’t be a problem on that end.”
Furloughed federal workers in the midst of a loan application face the biggest challenge among local buyers because often there isn’t anyone available to verify that they work in a particular agency. Davis says some federal workers also don’t have access to their W2 forms or pay stubs because they’ve been cut off from their government computers where that information is electronically stored.
“I haven’t heard of anyone’s loan being canceled or denied at this point, but I’ve heard of some settlements being delayed because lenders cannot verify employment for furloughed federal workers,” says Morgan Knull, associate broker with Re/Max Gateway in the District. “Many of the lenders I’ve talked to say they are closing loans without verification of employment or the borrowers’ tax returns and will audit their borrowers for that information once the government reopens.”
The biggest issue faced by all borrowers is that the Internal Revenue Service is closed and isn’t processing any requests for income tax returns, normally required by lenders for proof of income for borrowers.
Davis says that decisions about whether to waive some information temporarily are being made on an individual basis, with self-employed borrowers or those who earn money through commissions rather than a W2 less likely to be approved than those with consistent verifiable pay stubs.
Rates and potential default
If Congress doesn’t act in time to raise the debt ceiling by the Oct. 17 deadline, it’s possible that the federal government could default on some of its obligations and that the U.S. credit rating could be downgraded as it was in 2011, Haberle said.
“It’s hard to know what impact this could have on mortgage rates,” she says. “Mortgage rates went up 0.7 percent in 2011 after the credit downgrade, and that could happen again. Even so, that would only raise rates to about 5 percent, which is still very low.”
Davis says that while mortgage rates could go up, they could also drop further if the stock market plummets.
Advice for borrowers
“Whether you’re a furloughed federal employee or any other borrower, if you’re in the middle of a loan application you should call your lender to see what the ramifications of the government shutdown are for you,” Davis said. “Some lenders are working with people who already have an application in process but not accepting new files, but may be able to work around the situation.”
Knull recommends making sure you have a financing contingency in any offer to buy a home and arrange for the closing to be at least 30 days out in case there are delays.
“It’s time to be a little more cautious because no one really knows how long this will go on or what the collateral damage will be,” Knull said.
Michele Lerner is a freelance writer.