The guilty verdict of the landmark Sitzer/Burnett commission lawsuit case sent shockwaves across the real estate industry. In the aftermath, one of the most contentious issues in the minds of mortgage professionals is how the ruling might affect FHA and VA mortgage borrowers.
FHA loans are a popular option for first-time homebuyers or those who don’t have a lot of cash saved for a down payment, because the loans require a minimum of 3.5% down. VA loans offer a 100% financing option for qualifying military service members and veterans, and don’t require mortgage insurance.
In both instances, FHA and VA borrowers might see their up-front home-buying expenses increase if they have to shoulder agent’s commissions.
Mortgage professionals voiced their concerns of the potential ripple effects that might have on those cash-strapped buyers, depending on the results of the commission lawsuits.
“It would be a disaster for FHA and VA homebuyers,” Evan Potter, branch production manager at Revolution Mortgage.
Potter added: “Government lending would come to a halt. These clients are typically low on funds, which is why they need this type of financing. Adding this cost to their side of the transactions would throw the vast majority of them out of the market entirely.”
Despite higher mortgage rates, demand for FHA and VA loans has been on the rise. Of the $400 billion mortgage origination volume in the second quarter of 2023, FHA and VA share of loan volume consisted of 22.9%, up from 18% in Q2 2022, data from Inside Mortgage Finance (IMF) and the Urban Institute showed.
Not helping FHA, VA borrowers get off the sidelines
Under current FHA rules, sellers can contribute up to 6% in concessions to FHA borrowers to cover closing costs, prepaid expenses and discount points.
Seller concessions for VA borrowers are capped at 4% of the home’s purchase price or appraised value and can cover some closing costs, including the VA funding fee and prepaid taxes. The Department of Veterans Affairs (VA) rules prohibit VA borrowers from paying real estate commissions.
It was through seller incentives that loan originator Ryan Grant helped his FHA borrower buy down 3.5 points from the 7.5% mortgage rate to 6.25% on a $500,000 home in California.
“It is common across the board right now,” Ryan Grant, co-founder and division president of Neo Home Loans, said of borrowers using discount points to lower their mortgage rate.
“But agent commissions have never been a closing cost from a buyer perspective. We don’t even know if the buyer’s agent fee would be an allowable closing cost because they might not even be a material necessity to the transaction.”
Many borrowers opt for FHA loans because of lower credit score and down payment requirements compared to conventional loans, said Brian Covey, EVP at Revolution Mortgage.
In an environment of challenged affordability, a silver lining for borrowers has been temporary or permanent rate buy-downs they can pay for with seller incentives.
If FHA borrowers, for instance, used all 6% of seller concessions towards paying their agent’s commission, “you’re taking away either temporary or permanent interest rate buy-down opportunities,” Covey noted.
VA borrowers will be the hardest hit if they have to shoulder buyer-side commissions, said Jon Overfelt, director of sales and principal at American Security Mortgage Corp.
“VA loans are probably the best loans on the market. They’re 100% financing, they don’t require a down payment and the guidelines are tilted towards helping the [borrower] get in the home,” Overfelt said.
“I would hope something would come of that because these people fought for our country, right? They’ve earned the right to have that VA loan,” he added.
Agencies need to weigh in
There are different speculations as to what the final ruling of the Sitzer/Burnett commission lawsuit might be. The RE/MAX and Anywhere settlement agreements still need final approval and, with additional lawsuits expected, it will be months or years before any final resolution.
If cooperative compensation is banned, the Department of Housing and Urban Development (HUD) and the VA must weigh in to develop or accept a mechanism for FHA and VA borrowers and how to pay the buyer’s agent’s commission.
“Nobody’s ever had to ask the question, ‘Are buyer’s agent commissions considered closing costs?’ Or would those be considered more of a nice to have as opposed to must have?,” Grant said.
Representatives from HUD and the VA did not respond to HousingWire’s requests for comment.
Are commission fees a future negotiation point between sellers, buyers?
Buyers working with an agent or directly with a listing agent may need to figure out a way to negotiate these costs into the mortgage to reduce their down payments, said David Marden, designated managing broker at Hausmarkt.
“Sellers will adjust price based on market, but I am 100% sure buyers will be looking for ways to not come up with an extra 3% to pay a buyer’s agent,” Marden said.
In a sense, buyers have been paying their agent’s commission all along, because sellers bake the standard 6% commission fee (split evenly among each agent) into the home’s sales price, Marden noted.
“Realtors will have to decide, do I negotiate or not? Does the Realtor, in the case of an FHA or VA buyer, reduce their commission to try to close the transaction on the premise that instead of making 3% as a buyer’s agent, if I only made 2% and that helps close the transaction, is 2% better than zero?,” said Brian Hale, CEO and founder of consultancy Mortgage Advisory Partners.
While there would be an immense amount of confusion if changes in the buyer agent’s commission were to kick in, housing professionals should be focused on how they can deliver as much value to both sellers and buyers, Grant emphasized.
“This is going to be a massive needle mover,” Grant said. “I think that the mortgage professionals and the loan officers that wrap their heads around what value can I provide to my agent community to help them show a higher level of value to the consumer, they’re going to earn every penny and they’re going to be incredibly successful.”