Buyer Financing and Commission Financing After the Settlement
A Message from Ken Fears, NAR Director of Conventional Finance and Valuation Policy
The recently announced settlement raised several questions regarding access to mortgages and the ability to finance agent commissions. In short, under the settlement, buyers still have the same options when it comes to compensating their representative. That is, the listing brokers can compensate the buyer broker, the seller can compensate the buyer broker, or the buyer can compensate their broker directly. Based on conversations with contacts at agencies, we believe buyers should still be able to get financing from Fannie Mae, Freddie Mac, and the FHA under these scenarios. However, none of these agencies will allow the buyer to finance a commission into the mortgage at this time. The VA has not addressed whether it will change its requirement prohibiting VA buyers from paying the commission. NAR will continue to work with our partners in the lending community to gain greater clarity on guidance from the agencies and to maintain the steady flow of funding for closing home purchases.
Will buyers still be able to obtain a mortgage after the settlement?
Yes, based on our interpretation of the regulations, buyers should still be able to get financing from Fannie Mae, Freddie Mac, and the FHA if the listing broker compensates the buyer's broker or if the seller pays the buyer's broker directly. However, none of these agencies will allow the buyer to finance a commission into the mortgage at this time. NAR is working to get clear verification on this point.
Based on information in the guides that Fannie Mae, Freddie Mac and the FHA provide to lenders, nothing has changed the ability of buyers to get a mortgage through them. Each of these agencies specifies limits on how much a seller or broker can contribute to the buyer to pay for services typically paid by the buyer. These payments to the buyer are called interested party contributions (IPCs). The agencies exclude fees "traditionally" or "customarily" paid by the seller from the IPCs. These IPCs may vary from 3% or up, so adding a commission could take up room otherwise used for closing cost or rate buydown concessions. Thus, despite being a seller concession on the sale contract, a seller paid commission is not included in the IPC. This interpretation is not expected to change when this settlement is complete.
However, if sellers paying the buyer agent's commission ceases to be the norm in the future, regulators will need to change the definition of IPCs to exclude seller-paid commissions or raise the IPC limit.
See Fannie Mae's selling guide, Part B3-4.1-02, Interested Party Contributions and Part B3-4.1-03, Types of Interested Party Contributions (IPCs). Also, see pp. 420 of the Fannie Mae Selling Guide: "Typical fees and/or closing costs paid by a seller in accordance with local custom, known as common and customary fees or costs, are not subject to Fannie Mae IPC limits."
See FHA's discussion of IPCs and exclusion of seller paid real estate commissions here.
Can real estate commissions be financed?
Financing commissions is not feasible under the current structure of the residential mortgage finance system, and there is no clear short-term legislative or regulatory fix. NAR is working to get clear confirmation on this point.
- Banks would treat such a loan as a personal loan that would have higher rates and they would limit access to those loans to borrowers with better credit profiles. Furthermore, that personal loan would add to the buyers' liabilities and make it harder to qualify for the mortgage they are seeking.
- Fannie Mae, Freddie Mac, and FHA do not allow commissions to be added to the balance of the mortgage. Simply put, investors will only lend against the asset they can take back and sell in a foreclosure. An investor would not be able to take back and sell the commission for a service like real estate brokerage.
- Finally, there are significant limits to adding commissions to the mortgage rate. Several rules that make up the foundation of mortgage finance would need to be changed by the regulators and Congress. Those rules took years to develop, implement, and refine, and changing them could take years, potentially a decade or more.
