Consequences of a debt ceiling standoff

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As we’ve all been hearing and reading about over the last several weeks, a standoff is brewing in Washington DC between political parties involving the debt ceiling. One side wants to raise it. The other side doesn’t unless spending cuts occur. Unless a compromise is reached, many government services will be forced to shut down once government spending reaches the debt ceiling (technically we reached it weeks ago and “creative accounting” will get us to early August before the shutdown would become official).

US Debt Ceiling

Specifically relating to the mortgage industry, there are two consequences that won’t be a lot of fun – a potential suspension of FHA loans and no tax return verification services from the IRS.

FHA loans are funded by banks across the U.S., so this doesn’t mean the money to fund FHA loans is going to disappear. What it does mean is getting the government-insured mortgage insurance policies will be all but impossible while a government shut down is in place.

If pressed on the matter, lenders could probably fund and the float FHA loans until they could get the mortgage insurance from the government on the FHA loans once the shut down is over. The larger issue would be the suspension government services. Most government offices will close with the exception of social security, medicare, and the military. This means the IRS will temporarily close its doors.

Lenders require a verification of filed tax returns on all borrowers, and these requests are fulfilled by the IRS. Closing a loan without verifying the filed tax returns through the IRS in our cautious lending environment is a risk that many lenders may be unwilling to accept. Since the IRS would not be able to fulfill these requests, one can argue that this could effectively shut down the mortgage industry until the debt ceiling situation is resolved.

Hopefully nothing will come of this… the two sides will compromise… the shut down avoided… the housing market can continue to move along. That said, the potential shut down date is estimated to be only a few weeks away. What can should you do?

First, if the plan is to buy a home this summer, I would recommend getting started today. There is enough time to find a home and close on it prior to the end of July. Next, I wouldn’t have an extended closing date. If you can be ready to close before the end of July, do it to ensure your plans won’t be impacted by anything taking place in D.C.

Lastly, get started :-). If you plan to buy a home in the state of Georgia, I know just the person to help get you going!

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