Government shutdown and mortgage news: Things just got tougher for mortgage applicants

This is an update to an article published a few days ago about the government shutdown and mortgage applications. Fannie Mae just released new guidelines, and we’re breaking them down for you here.

New reserve requirements

The government shutdown has entered its fourth week. And now the FHFA worries that borrowers won’t be able to pay their mortgages. These new guidelines apply to ALL applicants, not just government employees.

According to Fannie Me:

“With the shutdown extending for a longer period of time, we are concerned about the impact that continued income interruption may have on borrowers’ ability to meet their mortgage payment and other monthly obligations.

“In light of this,” the agency states, “We are imposing a minimum reserves requirement, which serves as a compensating factor to offset the risk associated with the interruption of income.”

What are reserves?

“Reserves” are amounts available to pay your mortgage principal, interest, taxes and homeowners insurance (and flood insurance, HOA dues and other monthly costs if applicable). Reserves are expressed in months. Suppose that your monthly housing expense is $1.500. If, after closing on your home loan, you’ll have $2,000 in savings, your reserves equal 1.33 months ($2,000 / $1,500 = 1.33).

Therefore, you’d fall short. You need $3,000 in reserves to meet the two month requirement.

How much will you need?

So, for home purchases and refinances (other that the “high-LTV refinance that replaced the HARP loan) with application dates of today or later, applicants will need either two months of reserves, or whatever amount the automated underwriting software comes up with. Whichever amount is greater.

In addition, manually-underwritten loans, the requirement is equal to the amount listed in the Eligibility Matrix and ranges between zero and six months. Finally, those with multiple financed properties face higher reserve requirements than other borrowers.

Employment verification for government employees

Fannie Mae and Freddie Mac have relaxed requirements for employment verification for government employees.

These temporary requirements apply to ONLY to borrowers impacted by the shutdown. They will automatically expire when the federal government resumes full operations.

Verification of Employment (VOE) for most employees are still widely available from third party providers and automated systems. But if your lender can’t verify your employment, your loan can still close if your lender includes a statement showing the steps it took to obtain the verbal verification, and stating that it could not obtain the VOE.

In addition, pay stubs older than 30 days prior to the loan application are acceptable if they are the most current pay stub available. It must show year-to-date earnings. The lender may have to also supply the last pay stub issued in 2018 to prove the applicant’s annual income.

Finally, the lender must certify that the borrower is employed before it can deliver the loan to Fannie Mae or Freddie Mac.
application date. Lenders must obtain the most current paystub that reflects year-to-date earnings and may
need to obtain the final 2018 year-to-date paystub to accurately calculate income.

END UP UPDATE

Government shutdown shutting down some home purchases, refinances

Many of the most popular mortgage programs are administered by the US federal government. These include VA, FHA and USDA loans. And, since their takeover by the Federal Housing Finance Agency (FHFA), mortgages sold to Freddie Mac and Fannie Mae also fall under government control. So what’s happening with the government shutdown and mortgage closings?

Fannie Mae and Freddie Mac

Fannie Mae sent guidance to its lenders and mortgage servicers yesterday. This guidance, says Fannie Mae, assumes that the shutdown will be temporary. Additional changes may occur if it becomes an extended problem.

Fannie and Freddie will not decline mortgages to government employees affected by the shutdown at this time if they otherwise qualify for financing.

• If your lender cannot get written verification of your employment in your government job, the lender can obtain a verbal verification of your employment, even after the loan closes.
• However, the lender cannot deliver (sell) the loan to Fannie Mae until it obtains your employment verification. Some lenders may not want to assume this risk. Fortunately, the vast majority of mortgages go through automated underwriting and require only a recent pay stub and W-2 to prove your employment.
• For applicants in the military, a Leave and Earnings Statement dated within 30 calendar days (or 31 days for longer months) is acceptable documentation of employment. If a military borrower is furloughed on or after closing of the mortgage loan due to the shutdown, the loan can still close and be delivered to Fannie Mae.

Verification from government agencies

Some loans require government documents to finalize an underwriting approval. For instance, self-employed applicants’ tax returns must be checked against IRS records. If the agency involved is not processing these requests, everyone on the application will have to complete and sign a separate IRS Request for Transcript of Tax Return (Form 4506-T) Fannie Mae will not require lenders to obtain tax transcripts from the IRS prior to
closing, but may prior to delivery.

Applicants with Social Security Number issues (identity theft, for example) will still be processed. Fannie Mae says, “Because these requests may not be processed during the shutdown, Fannie Mae is temporarily revising this policy to enable lenders to obtain the verification prior to delivery of the loan. If the Social Security number cannot be validated prior to delivery, the loan is not eligible for sale to Fannie Mae.”

Flood insurance requirements

Properties secured by most mortgages must either be certified (not in a high-risk flood zone) or the borrower must obtain flood insurance through the National Flood Insurance Program (NFIP).

However, says Fannie Mae, “The NFIP may have limited ability to issue new policies, issue increased coverage on existing policies, or issue renewal policies during the shutdown.”

In that case, you can still get flood policies from private insurers that provide the same or better terms and conditions of coverage provided under the standard policy of the NFIP for the appropriate property type. Often for less money.

FHA

Almost exactly a year ago, the FHA posted an announcement about the effects of a shutdown on its borrowers. Here we go again:

The FHA sent out a letter this morning stating that they will be operating at a limited capacity. Here’s the scoop:

“While some services will continue to be operational, please note that across the board, the services that remain available during the shutdown will have significant impacts to customer service and/or limited functionality.”
The following pre-endorsement loan processes will be available during the shutdown, but with limited staff assistance available and longer wait times for assistance:

• Condominium Project approvals under the Direct Endorsement Lender Review and Approval Process (DELRAP)
• Manual endorsement actions: case number cancellations, reinstatements, and transfers
• Resolution of the Holds Tracking queue
• TOTAL Mortgage Scorecard evaluations

This means if your lender can’t approve your loan using automated systems, you may have to wait. For example, if your credit history is too thin, they have to underwrite you manually, using the TOTAL Scorecard. That will likely cause a delay.

Ditto certain condominium projects — condos not already FHA-approved will take longer to process.

The following processes will be unavailable for the duration of the shutdown:

• Condominium Project approvals under the HUD Review and Approval Process (HRAP)
• Test Case Loan Submission

If you already have an FHA loan approval, and your home appraisal and/or condo approval has no problems, you’re probably okay. But anything requiring extra attention from the FHA may take longer.

VA mortgages and the shutdown

The shutdown does not include employees who process and fund VS mortgages. And the VA is fully-prepared; the agency even has a Field Guide to Government Shutdown for its staffers.

The guide lists “home loan processing” among the operations not affected by the government shutdown.

One more way to say “Thank you for your service.”

USDA mortgage applicants out of luck

According to the USDA (same time last year), “The unavailability of servicing actions not deemed excepted could have a negative impact on the financial stability of customers and mortgage lenders’ financial operations. For example, borrowers would not be able to secure much-needed loans, make loan payments, or re-amortize loans.”

If you have a USDA loan in process, check IMMEDIATELY with your lender. Some will be able to complete your loan, depending on the program and lender policy. Others may cancel your mortgage entirely.

If you are unable to close your USDA loan, check out loans like HomeReady from Fannie Mae. You can find lenders for those programs right here on The Mortgage Reports.