A long shutdown could delay government-backed mortgage loans

October 4th, 2013 | by Dominique Fong | Comments
Photo credit: Associated Press

Photo credit: Associated Press

A prolonged shutdown could delay government-backed mortgage loans and slow lenders trying to pull borrowers’ tax records from the IRS, housing and loan experts say.

Some real estate sales in Palm Springs are already being delayed because the Bureau of Indian Affairs is closed and won’t be able to approve transactions on Indian lease land.

More delays could occur in sales involving government-backed loans or mortgage loans being processed by the IRS.

When borrowers apply for a loan, they provide financial documents showing their income, bank statements and credit history. Lenders verify those documents against papers the government keeps on a borrower, such as income tax transcripts and imposed tax liens.

Verifying tax records could get bogged down because 90 percent of IRS staffers have been furloughed in the shutdown, according to a CNN chart.

IRS information requests in the pipeline were already processed for lenders like Wells Fargo, USA Today reported.  New requests, however, might get delayed, holding up borrowers just starting to apply for a loan, the article said.

Sean La Rue, senior vice president of Franklin Loan Center in Palm Desert, said his company is still processing loans and hasn’t had problems ordering IRS tax transcripts, usually one of the last items a lender needs before funding a loan.

“We’re not actually experiencing issues on deals that are currently open,” La Rue said. “We can continue to process loans when the government’s shut down. It’s only at the time of funding that things could get held up.”

La Rue explained that Franklin will continue doing due diligence: making sure contracts are signed and home repairs are done, as well as requesting W-2 forms and 1040 tax returns. If the IRS stops issuing tax transcripts, that could be a barrier to the funding of a loan.

If the shutdown continues, there’s an alternative: La Rue may consider funding a loan with the information he already has on a borrower. That’s a risk for lenders, if a borrower’s information doesn’t add up to the government’s records once agencies return online.

“If we go too early and the information doesn’t check out, we’d have to start over,” La Rue said.

The biggest delay could come from the VA, which appraises properties for VA home loans. New appraisals typically take 10 to 14 business days and will probably get stalled, La Rue said.

FHA-insured loans may also get backlogged. The FHA, which insures about 60,000 loans per month, will have limited staff to underwrite and approve new loans, according to the U.S. Department of Housing and Urban Development.

Some of the bigger lenders will continue to close FHA loans because they have the authority to assure the federal agency that records have been checked, USA Today wrote. Smaller lenders, however, may not have that authority and could run into more delays.

Lenders and borrowers, how are you being affected by the shutdown?

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