Financing Agent Commissions Doesn’t Pencil Out for Buyers, Mortgage Experts Say

As the real estate industry braces for new rules that remove all offers of agent compensation from for-sale listings, mortgage lenders are weighing their options on how to best help cash-strapped buyers who will ultimately be responsible for paying their agent’s commission.

Beginning Aug. 17, the National Association of REALTORS® (NAR) will prohibit all offers of agent compensation on the MLS; however, buyers and sellers can still negotiate this on their own. Another key change is that MLS participants working with buyers must enter into written representation agreements before touring a home.

The new rules are part of the bombshell $418 million antitrust commission lawsuit settlement NAR agreed to earlier this year.

With the new rules going into effect in just a few weeks, lenders are trying to find workable solutions for buyers struggling to pay an agent commission out of their own pocket. But some mortgage leaders say that financing the buyer agent commission as part of a buyer’s mortgage isn’t exactly an ideal option.

Matt Jones, associate vice president of government housing finance with the Mortgage Bankers Association (MBA), says that the MBA doesn’t advocate for financing the agent commission into the loan amount.

“There’s been a pretty significant debate around that issue, and I think a little bit of a mischaracterization in that it’s just adding 2.5% or 3% of the financed amount, right? Well, it’s actually more than that depending on the loan product,” Jones tells RISMedia. Earlier this year, Jones and other experts discussed the issue at length during a panel at NAR’s midyear legislative meetings.

Jones adds that increasing your financed amount at current mortgage rates, which hover around 7%, also increases your loan-to-value (LTV) and debt-to-income ratios, triggering additional loan-level pricing adjustment (LLPA) fees.

In other words, borrowers who need to finance their agent’s compensation will have even more limited borrowing power in an already tight housing market of high home prices and elevated rates.

“It could also force you to have additional mortgage insurance, depending on the (LTV), which could also translate to potentially doubling what you think the additional cost is by financing (the commission) versus having it baked in or by virtue of the seller covering it,” Jones explains.

“That’s why, again, it’s probably close to double what people expect if they do the back of the envelope on financing (a 3% commission) at 7%. That’s the part that we think has been missing from a lot of people’s analysis.”

First-time homebuyers of limited means stand to lose the most

The Federal Housing Administration (FHA) announced it would continue to allow seller-paid commissions and leave those contributions out of its 6% seller contributions cap. Meanwhile, the Department of Veterans Affairs (VA) relaxed its rules to allow VA borrowers to pay their own agent’s compensation directly; sellers were previously required to pay it.

But even if sellers and buyers can negotiate agent compensation outside of the MLS, sellers may be unwilling to cover the buy-side agent’s commission, which has averaged around 2.5% of the purchase price.

So, that begs the question: How will low- to moderate-income homebuyers—many of whom rely on low down payment mortgage programs—afford an additional 2% to 3% in agent compensation on top of down payment and closing costs? And, worse still, what if they forgo buyer representation entirely to save money?

“A buyer, historically, who had 3% down and a buyer who had 20% down, those two buyers still were able to purchase the same amount of house, because we would finance the same amount for both of them that they needed—the residual balance of their down payment,” says Taylor Stork, COO of Developer’s Mortgage Company based in Huntingdon Valley, Pennsylvania. Stork is also president of the Community Home Lenders of America, a national trade group representing small- and mid-sized community-based mortgage lenders.

“Today, those two buyers are at odds because the buyer that only has 3% to 5% down can’t come up with an extra $15,000 to buy that house,” he points out. “That is a fundamental problem regardless of whether VA and FHA allow for interested party contributions that do not trigger the caps.”

Greg Sher, managing director of Maryland-based NFM Lending, agrees.

“This is a first-time homebuyer’s nightmare at the worst possible time,” says Sher.

While there’s clear opposition and obvious cost drawbacks for buyers to finance an agent’s commission into their loan amount, Stork notes that the agent commission already comes out of the loan proceeds, which the lender pays. So, in essence, lenders are already financing the agent’s commission.

“Those of us in the industry, we all know that if you have a $400,000 house and then you negotiate seller credits of 3%…then that 3% gets added into the loan amount into the purchase price. Then that contract is structured at $412,000,” explains Stork.

He adds that the appraiser enters the picture and says the home is worth $412,000 to ensure the loan is approved. Finally, the lender finances the loan at 96.5% of $412,000 inclusive of the sales price and the agent’s compensation.

“Now, you tell me: Did we just finance 96.5% of the commission? Of course we did,” Stork says. “We can all cover our eyes and go no we didn’t do that, but we did. So the concept that somehow the borrower isn’t paying for commissions…I can’t wrap my head around that.”

More concerning, Stork says, is that the industry might head into a new phase where first-generation homebuyers or those without much financial literacy will opt for limited or discounted agent services. They might get less support and fewer options as an unintended consequence of the commission lawsuits, Stork points out.

“I just don’t see how that’s good,” Stork says.

How lenders are meeting the moment

Come hell or high water, Aug. 17 is just around the corner. While it may be business as usual for some lenders, others are being proactive about finding solutions for their customers.

“These (rules) are going to change the way a lot of people do business,” says Brandon Matyas, assistant branch manager at CrossCountry Mortgage based in Lansdale, Pennsylvania. “I think that from a real estate perspective and the mortgage side of it, we’re going to have to act more closely as a team and provide a lot of value—especially when you have sellers and buyers asking why exactly are they paying this commission and if it’s negotiable.”

Matyas anticipates that most buyers will have to finance their agent’s commission into their loan amount because only a small pool of buyers of means will be able to afford it upfront.

Some mortgage companies are meeting the moment by innovating their product offerings, particularly down payment assistance programs.

For instance, Stork points out that his company, Developer’s Mortgage, is soon rolling out an enhanced DPA program paired with FHA loans that provides up to 5% of a borrower’s purchase price to put toward their down payment and closing costs. It adds an additional one-and-a-half points over and above the total loan amount. In turn, this frees up cash and capital for buyers to pay their agent’s commission, he says.

“We think that by bringing to market a down payment assistance program that can reduce the total costs for the buyer, that puts them in a better, more competitive position to participate. That is one solution,” Stork says.

Sher predicts that NAR’s new rules might spur many real estate agents to abandon ship and leave the business. And that could be a “death knell,” Sher says, for loan officers who largely rely on real estate agent referral partners to fuel their mortgage leads.

“In my opinion, it’s up to every mortgage company to bolster their educational materials and to lift their agents up, support buyer’s agents and prepare them to meet the moment, which is a moment that will require a lot of hand-holding and financial literacy components,” Sher says.

“The lenders that put a lot of focus on educational materials and sharing expert collateral, and come up with ways to get in front of all of their referral partners in a meaningful way, they’ll thrive as a result of this.” Jones, the MBA executive, notes that at a time when there’s been substantial volume and margin compression on the trade group’s members, a lack of housing supply due to the mortgage rate lock-in effect is more of an issue driving slower demand.

“I think the REALTOR® issue doesn’t necessarily impact unit margins all that much, but, certainly, the overall lack of deals being done today is continuing to be a struggle for anyone that is a retail mortgage lender,” Jones says. 

What comes next?

Many analysts who’ve followed the compensation lawsuits predict that, ultimately, the new rules and untying agent compensation from MLS participation could lead to significant savings for American households in the form of lower real estate commissions, though many in the real estate industry have pushed back and argued that there isn’t strong evidence the change will benefit consumers.

The settlement changes could also lead to the availability of different real estate service models, such as per-hour or flat-fee compensation, or tiered service packages, according to commentary from Brookings Institute researchers Ben Harris, vice president and director of economic studies, and research assistant Liam Marshall.

“One plausible outcome might be the number of agents declining over time, with those remaining in the realty market taking on a higher number of home transactions each year,” Harris and Marshall wrote. “Another plausible outcome is that the market experiences a boom in innovation and entrepreneurship, with new business entrants experimenting with various models of homebuying and selling.”

With national existing-home sales down 2.8% in May from a year ago and median home prices hitting a new record high of $419,300, buyer demand is unquestionably sluggish. It’s likely to remain that way for the rest of 2024 until mortgage rates or prices come down and coax more potential buyers off the sidelines.

“The first-time homebuyer is in a bad position right now and getting worse,” Sher says. “It’s not going to change anytime soon, for sure. I think (the industry) is going to work on new construction, and they’re going to work to address the supply problem. Then one day, we’re going to look up and there’s going to be too much supply. And when that happens, then I could see values going down significantly, but not until that happens. That’s three to five years down the road.”

NAR’s new changes might make it tougher for a notable share of the nation’s estimated 2 million licensed real estate agents to survive in the real estate profession, too. That’s why it’s critical, Matyas says, for all housing professionals to educate clients and show how they add value to the transaction.

Part-timers who aren’t upskilling, who are doing few deals and not providing value, are likely to struggle the most and, potentially, make mistakes that come back to bite them, Matyas points out.

“And we don’t need that in the market. With where we’re at right now, we need really good, educated, value-proposition individuals to help out buyers, because it is brutal out there.”