The federal government officially kicked into partial shutdown mode on December 20, 2018. Two weeks later, the Internal Revenue Service (IRS) and other government agencies remain mostly closed. While that makes it difficult for those taxpayers seeking refunds or abatements, paying bills and attempting to stave off collections (you can read what’s still functioning—and what’s not—here), there’s a side effect that you probably weren’t counting on: delays in financing or refinancing mortgages and other loans.
As part of the IRS shutdown, the processing of tax transcript requests is limited to those tied to disaster relief. There is no processing of nondisaster relief transcripts—in other words, those that lenders depend on for mortgage, student loans and other borrowing.
What does that mean for borrowers? Jason F. Griesser, CMB, and vice president of mortgage lending at Guaranteed Rate says that the lack of transcripts is causing issues for homebuyers and others seeking loans. Specifically, he says that taxpayers are having difficulty obtaining income validation for form W-2 and personal tax return income. That’s information that all residential lenders require on every mortgage application. Lenders depend on IRS transcripts to ensure that the income that the borrower has disclosed matches up with what is reported to the IRS.
The way that most lenders do this is through the use of a form 4506-T, Request for Transcript of Tax Return (downloads as a pdf). In fact, it’s such a common request that the IRS has a line item on the form which calls out mortgage companies:
If those transcript requests aren’t being processed, there are no transcripts to provide to the lender and thus no income validation. If there is not income validation, there may be no mortgage (or other loan).
Title companies are also running into difficulties. Typically, before sale, a title company will check to make sure that the sellers can provide clear title. In addition to confirming any mortgages and like, this means that any federal tax liens that show up on a title report must be addressed. The normal route is for a taxpayer to request a discharge, withdrawal or subordination of the lien, depending on the amount in question and the circumstances, prior to settlement (more on liens here). However, if there’s not sufficient IRS staff to answer the phones or respond to lien satisfaction requests, the lien will remain on the report, and that’s likely to stall any planned settlement.
It’s not just the shutdown at IRS that’s causing mortgage and settlement headaches. With personnel offices also shut down, it’s tough to obtain employment verification for federal employees. Griesser notes that some lenders are trying other options, like confirming status over personal phone connections with employers (of course, that only works if you know your boss’ home phone number and it’s okay to call). Last week, Griesser says, he was able to obtain an acceptable verbal verification for a borrower just two hours before a scheduled closing.
And while the focus might be on current federal employees who are affected, veterans are also feeling an impact. VA loans for veterans require many government forms and processes. If those forms aren’t being processed and other criteria aren’t met, those loans may not be pushed through.
The situation, Griesser says, has created “even more anxiety and stress in what is already a highly stressful situation” for homebuyers.
So what’s the solution? When it comes to choosing a lender, Griesser suggests that you work with a company that is willing to be creative—while still being responsible—through the lending process. He note that his company has shifted their policies to ensure that buyers get into their homes when scheduled. The flexibility to try new or alternative measures to keep to a timeframe is a plus compared to some big banks and lenders who are required to follow a more rigid approach to mortgage operations.
You should also plan as far in advance as possible. There’s no telling how long the shutdown might last, so if you anticipate needing certain kinds of financial or tax verification, start thinking about how you might be able to get that information if you can’t rely on IRS or other federal agencies. And, if you have a tax obligation, such as a federal tax lien, plan on extra time to resolve it: Remember that the shutdown is also creating a backlog of requests yet to be processed. Expect delays and act accordingly.