Government Shutdown May Impact First-Time Home Buyers

government shutdown
government shutdown

The government shutdown that will occur if Republicans in Congress and President Obama can't come to terms on budget legislation by midnight tonight could hit the ailing spring home-buying market like a ton of paving stones.

The Federal Housing Agency (FHA), a popular source of low-down-payment mortgages of as little as 3.5 percent for first-time buyers, will be closed along with other government organization. The FHA doesn't issue mortgages but rather insures lenders against default risk for any loans that meet its criteria. Of course, banks will still be able to make these loans without the FHA, but they will have to fund and backstop these loans themselves.

On Wednesday, President Obama confirmed that a federal government shutdown could mean that "somebody who was trying to get a mortgage can't have their paperwork processed by the FHA and now the person who was going to sell he house, what they were counting on, they can't get it." Mortgages backed by Fannie Mae and Freddie Mac, which now usually require 20 percent down payments, would not be affected by the shutdown, according to the Wall Street Journal.

Housing and Urban Development Secretary Shaun Donovan, pictured, told a Senate subcommittee he was "very concerned that a significant number of lenders would not choose to close on those loans" backed by the FHA. "This is the worst time that we could introduce that uncertainty into this fragile housing market."