The U.S. Department of Veterans Affairs (VA) has recently made a significant decision that could reshape the landscape of home buying for veterans: allowing veterans to pay real estate commissions directly. This move, announced on May 21, 2024, is a substantial shift in policy, and it has important implications for veterans looking to buy homes using VA loans.
Let’s explore what this decision means, its potential impact, and how veterans can navigate this new landscape:
The Policy Change Explained
Traditionally, when veterans used VA loans to purchase homes, VA regulations prohibited the veterans from paying certain fees, including real estate commissions. These costs were typically covered by the seller, which was common in nearly every transaction, veteran or not. The VA’s recent decision changes this by temporarily permitting veterans to pay real estate commissions directly.
Why the Change?
In early 2024, the National Association of Realtors (NAR) settled a lengthy lawsuit (Sitzer-Burnett), which detailed how real estate commissions are to be disclosed and who pays those commissions. While the settlement has not yet been accepted by the court, the NAR-proposed settlement has caused a tremendous uprise in the real estate industry. By the impending effective date of August 17, 2024, NAR must implement the proposed changes that were listed in the proposed settlement. The following non-exhaustive list stated in the NAR proposed settlement establishes a few key items that affect NAR members and NAR participating MLS companies:
- Compensation offers removed from MLS listings: NAR has agreed to put in place a new rule prohibiting offers of compensation on the MLS. Offers of compensation may be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals. Sellers can also allow buyer’s concessions for an agent’s commission.
- Mandatory buyer/agent agreements: NAR will implement a new rule requiring a written agreement between buyer and buyer’s agent regarding potential commissions BEFORE touring a home.
- Settlement fee: NAR will pay a large settlement fee to the class established in the settlement.
NAR has pressured VA, as well as others, to make the commission changes indicating that the decision to allow veterans to pay real estate commissions would address several key issues:
- Competitive Market Advantage: In hot real estate markets, sellers often receive multiple offers. By allowing veterans to cover real estate commissions, veterans’ offers may become more competitive since sellers won’t have to bear this cost.
- Increased Flexibility: Veterans now have more flexibility in structuring their home purchase deals. Veterans can negotiate more freely without the constraint of the seller needing to pay the commission.
- Streamlined Transactions: This change can potentially lead to quicker transactions because it removes a negotiation hurdle and simplifies the closing process.
Are these Changes Necessary?
A lot must be considered when looking at the settlement and the rule change. The details of the settlement really don’t change the way real estate has been practiced for decades. Buyer’s agents by-and-large have negotiated commission splits with seller’s agents for many years. The settlement does not take away this option and only prohibits the listing agent from disclosing a potential commission split on the MLS listing. However, the settlement does not prohibit the listing agent from advertising it on their own website listings. Additionally, in many states, while not mandatory, a buyer/agent commission agreement has been encouraged. The proposed settlement only establishes a rule for NAR member agents to ensure they have an agreement in place prior to showing a home to a prospective buyer.
Potential Effect of This Decision
Ultimately, it isn’t just veterans that this decision may impact. Most buyer agent fees are 1.5% to as much as 3% of the purchase price of the home. Many home buyers generally don’t have the additional liquid money to pay a buyer’s agent. Historically, sellers have paid this fee simply because buyers don’t have the cash available. In the case of a conventional loan borrower, buyers are already trying to provide a down payment between 5% and 20% to reduce the Mortgage Insurance premium. For a HUD/FHA borrower, historically buyers are already struggling to provide a 3.5% down payment. In both circumstances, for the buyers an additional cost for the commission has a substantial impact. For a conventional borrower, it could mean using some of the money set aside for a down payment resulting in a higher Loan-to-Value. This results in higher interest rates and insurance, ultimately increasing the borrower’s payment. For a HUD buyer, the extra commission payment may take them completely out of the home buying market until the buyer can effectively save an additional amount for the commission. And finally, for the veteran; regardless of having funds available, the program has never allowed veterans to pay this fee. Veterans are more than likely the least affected by the new NAR settlement, but the decision may bring about other changes in the future.
Conclusion
The VA’s decision to allow veterans to pay real estate commissions is a significant shift in the home-buying process for veterans. This change may help more veterans achieve their dream of homeownership.
It may also provide greater flexibility and make veterans’ offers more competitive, but at what cost?
The new decision also requires veterans to be more financially prepared and well-informed about the home-buying process. With the right guidance and planning, veterans can navigate this new landscape successfully and potentially benefit from the opportunities this policy change presents.
For more information or questions, contact Jeff Wilson, NMLS# 1811820, @ 615.293.2775 or [email protected].
