How the Current Government Shutdown is Affecting FHA Mortgages

Effect of Government Shutdown on Home RatesThe housing market has been recovering steadily lately, but the current government shutdown may interfere with that progress. For the first time in 17 years, the government has partially shut down. Besides other important implications, this shutdown could affect people who are looking to buy a home or refinance their current mortgage loan. Around 90 percent of all mortgages are government backed, but the loans that are purchased by Fannie Mae and Freddie Mac won’t be affected, because these two companies fund their operations with money from fees that they charge mortgage lenders.

Other popular government backed mortgages include loans offered by the United States Department of Veteran Affairs (VA), the United States Department of Agriculture (USDA) and the Federal Housing Administration (FHA). It seems that the loans offered to military personnel by the VA won’t be affected by the government shutdown. Loans offered by the FHA, which account for 45 percent of all mortgages issued in 2012, will be most affected during the government shutdown. The Department of Housing and Urban Development announced that they will stop processing mortgage loans insured by the FHA if the government shuts down, but they reconsidered their position a few days later.

How is a Government Shutdown Affecting the Housing Market?

Normally, a government shutdown means lower interest rates, so an increase in the number of new mortgages is expected, but this shutdown comes at a very bad time, because the construction industry and sales for new homes were just starting to recover faster. Here is how a government shutdown affects the housing industry and those who are planning on taking out a mortgage loan.

  • Lower interest rates for mortgages. Interest rates have been increasing steadily lately because the economy is growing stronger, but a prolonged government shutdown can impact the economy in a negative way, so interest rates will most likely stop increasing, and even start going the other way. The longer the government shutdown lasts, the more will mortgage lenders decrease interest rates. However, it looks like, so far, the government shutdown had a smaller than expected impact on interest rates.
  • The mortgage application process may be slowed down. When someone applies for a mortgage, the lender has to verify the borrower’s income by checking his or her tax returns. Because the Internal Revenue Service workers are not working due to the government being shut down, lenders will have a hard time checking a borrower’s financial situation, so his or her application process may be put on hold until the government resumes its activity.
  • The housing market is weaker. Because many people employed by government agencies, such as the United States Housing and Urban development, are not working during a government shutdown, the housing market will face numerous difficulties. People who are in the market for a home or those who wish to refinance their mortgage could be unable to get their applications approved, so the number of home sales and mortgage refinances may decline.

How Will FHA Mortgages Be Affected

When the government shutdowns started to seem inevitable, the U.S. Department of Housing and Urban Development (HUD) announced that processing loan applications for FHA mortgages will be put on hold. In order to support the housing market, that position has been reversed, so applications for FHA mortgages will still be processed. However, only loan applications for single-family homes will be processed. Loan applications for condos will not be processed during the government shutdown.

As long as the government shutdown is brief, the U.S. Department of Housing and Urban Development does not expect the housing market to be significantly affected. Because the Federal Housing Administration (FHA) is also a government organization, it will probably be unable to process the loan applications at the usual rate, thus some home buyers might be affected by the slower than usual approval process. Other than that, FHA mortgages shouldn’t be affected too significantly by the government shutdown, as long as it doesn’t last for a very long while.

If you are a home buyer or a homeowner who is waiting for an FHA loan to buy a home or refinance a mortgage, the current government shutdown might make the approval process slower for you, or interfere with your ability to get the loan. Most government employees are not working during the government shutdown, making it harder for lenders to check your financial situation, and for your loan to be approved.

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