What happens to mortgage rates in a government shutdown

The average mortgage loan weaves together services from private lenders and federal agencies.

So as another government shutdown looms on the horizon, many home shoppers are asking an important question:

What does this government shutdown mean for my mortgage loan? How will it affect the housing industry in general?

What a government shutdown means for the housing industry

A government shutdown affects the housing industry in two distinct ways:

• Through market volatility generated by the shutdown and its effects
• Through a reduction of government services that support the mortgage industry

First, let’s look at the big picture: how a government shutdown affects the overall housing market.

A government shutdown could lower mortgage rates

Investors fear government shutdowns. So when shutdown threats emerge, markets react with uncertainty. 

Market uncertainty during shutdowns makes investors rush to safer options. Treasury bonds rank among the safest investments. Higher demand for bonds drives up bond prices, which lowers bond yields. 

Mortgage rates tend to follow the 10-year Treasury yield's path, which means home loans could become more affordable in the aftermath of a government shutdown.

For example, the 2013 shutdown lasted 16 days and saw mortgage rates drop overall, despite higher market volatility. The longest shutdown on record lasted 35 days in late 2018 and early 2019. That shutdown lowered mortgage rates at first, but then they returned to normal before the shutdown ended. 

The possibility of lower rates may sound like good news to home shoppers, but other effects of an extended shutdown could have the opposite effect.

Lack of government data affects market conditions

Economic forecasting creates a knowledge base for the housing industry. Forecasting gets a lot harder during government shutdowns. The flow of market data stops. This creates an information vacuum and makes mortgage industry decisions harder.

For example, the Bureau of Labor Statistics job report scheduled for release in early October will not be published if the government shuts down.

Markets would have to operate blindfolded without this significant employment data. They'd have to rely on less complete private reports. 

This gap in information could have ripple effects since the Federal Reserve bases its decisions on whether to lower or raise interest rates, in part, on employment data. 

Other data gaps increase volatility

Data delays during a shutdown could affect economic indicators. The Federal Housing Finance Agency (FHFA) house price index would stop, for example. This index helps assess the housing market's health. 

Consumer price data might also become unavailable, leaving analysts less able to measure inflation which the Fed also uses as an indicator for interest rates. 

How a government shutdown affects mortgages services

It’s hard to predict exactly how volatility from a government shutdown will affect mortgage rates.

What’s more certain is a shutdown’s impact on the government services that support lenders and borrowers.

How a shutdown affects conventional and government-backed loans

Fortunately, Fannie Mae and Freddie Mac, the government-sponsored enterprises that regulate conventional loans, do not rely on Congressional funding. This means they can continue their work even when the President and Congress padlock other agencies.

But about a third of new mortgages come through the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).

First-time buyers often depend on these programs because their government insurance allows lenders to lower qualifying barriers.

Shoppers who plan to use VA, USDA, and FHA loans could see processing delays as these agencies rely on emergency staffing during a shutdown.

Lack of IRS and SSA verification could slow applications

Many loan types require tax transcript verification through the Internal Revenue Service and income verification through the Social Security Administration. These checks usually happen seamlessly, but they often aren’t available when government offices are closed. 

This problem could be exacerbated by the already low staffing levels created by the Trump Administration’s mass layoffs earlier this year. 

Flood insurance policies lapse in high-risk zones

Homes located in flood zones require insurance from the National Flood Insurance Program whose funding would run out during a government shutdown. This could make these homes impossible to buy and sell. 

Will a government shutdown affect your mortgage rate and your closing day?

The short answer is yes, it’s very likely a government shutdown will affect home shoppers even if they’re under contract and awaiting their closing day.

The frustration this causes throughout the real estate industry can have a big impact on the overall housing industry. For example, during the 35-day shutdown in 2018-2019, existing home sales dropped, according to the National Association of Realtors. 

Shutdowns are especially tough on first-time home buyers who rely on government-insured loans like FHA and VA mortgages. 

The best advice for home buyers: Communicate often with your lender, your Realtor, and the home’s seller. Remain calm and focus on what you can control: Providing documentation, scheduling closing services, and staying patient.

FAQs about mortgages during a government shutdown

Will a government shutdown affect my ability to get a mortgage? 

Yes, a government shutdown can impact mortgage processing. It may cause delays in verifications from agencies like the IRS and Social Security Administration. A shutdown will likely slow approval for government-backed loans such as FHA and VA mortgages. 

How does a government shutdown impact mortgage rates? 

Historically, mortgage rates decrease some during a government shutdown. This is because economic uncertainty leads investors to shift towards safer investments like Treasury bonds, which can ultimately lower mortgage rates. But processing delays offset these potential benefits for borrowers.

Can I still close on my home during a government shutdown? 

Closing on a home during a government shutdown is still possible. After all, private lenders issue mortgage loans. When private loans also rely on government services, like government mortgage insurance or flood insurance, they will likely encounter delays in closing. 

Are all types of mortgages affected by a government shutdown? 

No, government-backed loans like FHA and VA mortgages are typically more affected than conventional loans during a shutdown. These loans rely on agencies directly impacted by funding lapses and may face more significant processing delays or interruptions.

Despite the shutdown, private lenders continue to finance the housing industry

Even with the government shutdown hobbling public services that support the mortgage industry, home buyers and refinancing homeowners can still get the loan they need.

Private lenders like Better continue to guide their clients through the mortgage process.

Better's digital mortgage calculators and AI-driven pre-approval process can still help borrowers make the best-informed decisions.

...in as little as 3 minutes – no credit impact