In a few weeks, sellers will ostensibly no longer be responsible for paying both the listing agent’s and the buyer’s agent’s commission.
I use the word “ostensibly” because I think sellers will still end up paying, as I explained in this blog back in April: New Take On NAR Lawsuit From Attorney In the Trenches.
In any case, we are now getting questions from agents in regard to the options buyers have when it comes to covering buyer’s agent commissions.
Options for Paying Buyers’ Agent Commissions
1) Pay Out of Pocket
This is the obvious one, and the one we all want to avoid for several reasons: (1) most of our buyers are very tight when it comes to cash to close; (2) buyers want to preserve cash for after close to help with move-in and typical new home costs; and (3) commissions are frankly more painful to pay when they come directly out of pocket.
2) Seller Credits
I suspect we will start to see a lot more seller credits for buyers’ agent commissions, and the good thing is that Fannie Mae’s and Freddie Mac’s official policies are that these are not “Interested Party Contributions (IPCs)” meaning that credits for buyers commissions are not subject to the seller credit limits as defined by Fannie, Freddie, and FHA. These limits for seller credits are 3% of the purchase price when buyers use conforming financing and put down 5% or less. The limit is 6% though for FHA or conforming financing with more than 5% down. Some lenders, however, are not following Fannie’s and Freddie’s official policies, however, and are playing it safe by deeming credits for commissions IPCs. HERE is Fannie’s official statement about IPCs and Credits for Commissions that they released in April.
3) Lender Credit
This will only go so far, as such credits are based on loan amounts, they will never be enough to cover full commissions, and they result in higher rates. Typically, a 1/4% higher rate results in a lender credit of about 1% of the loan amount too. And increasing rates more than 1/4% often provides too little benefit to make it worth it.
4) Increasing Loan Amount
Buyers cannot increase the loan amount to cover buyers’ agent commissions without impacting LTV guidelines – meaning buyers cannot simply “finance” commissions. For example, for a $500,000 transaction with 20% down, the loan amount would be $400,000. If the buyers want to “finance a 3% commission ($15,000),” the only way is to lower the down payment from $100,000 to $85,000 – and then get a loan for $415,000 instead of $400,000. This would, however, increase the loan-to-value ratio to 83%, and require that the borrower obtain Private Mortgage Insurance. This is surprisingly cheap though, making this option more than viable. This option will usually not be viable for a borrower putting down 5% or less.
5) Down Payment Assistance (DPA)
This is not just an option for borrowers tight on cash! Many DPA programs do not limit the amount of down payment a borrower can come to the table with; this can be a particular advantage if the DPA program provides a grant or a low-rate 2nd loan with which to cover closing costs. For example, one of our favorite DPA programs in California, CalHFA, will let borrowers finance their closing costs at a 1% simple interest rate – a screaming deal by any standard. So, for a $500,000 purchase using CalHFA, the borrower can borrow $15k with which to cover commissions and other closing costs – and they will only owe $150 per year in interest on that $15,000. The drawbacks to these types of programs may be slightly higher rates and slower closing timelines, but generally still competitive 21 – 30 day closes.
What will financing an extra $15,000 cost buyers if they increase their loan amount to cover the buyer’s agent commission?
$15,000 at 6.5% increases a monthly payment by about $94. If buyers increase the purchase price by $15,000 to give the seller a stronger incentive to offer a seller-credit, they will see smaller increase in payment, depending on the down payment %. A $15,000 increase in price, for example, will only result in a $12,000 higher loan amount if the buyers are putting down 20%. A $12,000 at 6.5% increases a monthly payment $75 per month.
NOTE: My $500,000 example works for well for our clients in lower priced areas. Clients in higher priced areas can simply double the numbers for an assumed $1 million scenario.
Will Credits for Commissions Not Be “IPCs?”
There is much chatter about whether or not seller credits for commissions should be considered “Interested Party Contributions” or IPCs. If they’re not, then the limits discussed in option #3 above will no longer be in play. Lenders, however, are all playing it safe, and still subjecting buyers to the IPC limits discussed above. This could, however, very likely change. If this does change, a buyer putting 5% down could get a 3% seller credit for closing costs and another 3% seller credit for the buyer’s agent commission.
Financing Seller Commissions
There is chatter about whether lenders will allow buyers to simply increase loan amounts to finance commissions, without impacting loan-to-values (LTVs) – similarly to how FHA Up Front MIP can be added to loan amounts without the corresponding increase in LTV impacting the financing. Lenders, however, are not allowing this at all, and I am not aware of any pending changes.
(Originally published on jvmlending.com)
