“Rolling-In” Buyer Agent Commissions ILLEGAL?

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Yes, it is legal to roll the buyer’s agent’s fee into the purchase price in the form of an increased sale price, but this is subject to negotiation between the buyer and seller. However, there are several key considerations:

1. Appraisal Value: The most important factor is the appraisal. If the buyer and seller agree to increase the purchase price to cover additional costs (such as the buyer’s agent fee), the home still needs to appraise at or above that increased price.

• Lenders will only provide financing based on the appraised value or the purchase price, whichever is lower. If the appraised value comes in lower than the adjusted purchase price, the buyer would need to make up the difference out-of-pocket.

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2. Lender Requirements: While it is legal to adjust the purchase price, the lender must approve the overall loan structure. Lenders typically finance the purchase price and standard closing costs, but they may have restrictions on what can be included, particularly if it impacts the loan-to-value ratio (LTV).

• Some lenders may have policies against explicitly financing commission fees, so it’s essential to confirm with the lender.

FHA Loan Requirements:

• The Federal Housing Administration (FHA) does not allow buyers to roll buyer’s agent commissions into the loan. The loan is based on the lesser of the appraised value or purchase price, and additional costs like the agent’s commission must be covered outside of the loan, often by the seller or buyer separately. FHA loans are strict about LTV ratios, so rolling in commissions would disrupt that calculation.

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VA Loan Requirements:

• VA loans are more flexible in terms of closing costs, and the seller can cover certain costs, including buyer agent commissions, under VA rules. However, the VA loan itself cannot be used to finance buyer agent commissions directly into the loan. The commission must be paid through negotiated seller concessions or other means.

Conventional Loan Requirements:

• For conventional loans, it is not typical to roll buyer’s agent commissions directly into the mortgage loan. Conventional loans base their financing on the appraised value or sale price, and commission fees are not considered part of the loan’s purchase amount. However, if the purchase price is increased to include agent commissions and the home appraises for that higher amount, the loan may cover the higher price as long as LTV and other ratios meet the lender’s requirements.

3. Disclosure and Transparency: The transaction must be transparent. If the purchase price is increased to cover additional costs like the buyer’s agent commission, it needs to be disclosed clearly on the contract and in the closing documents (HUD-1 or Closing Disclosure) to ensure all parties, including the lender, are aware of the arrangement.

4. Impact on Monthly Payments: Increasing the purchase price to cover additional fees will increase the buyer’s loan amount and monthly payments, so the buyer needs to be comfortable with the impact on their finances.

• A higher loan amount means higher monthly payments, which could affect the buyer’s debt-to-income (DTI) ratio, potentially influencing their loan approval or the terms they qualify for.

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FHA Loans:

• FHA loans have a DTI limit of 43%, meaning the monthly mortgage payment, combined with other monthly debt payments, cannot exceed 43% of the borrower’s income. An increased purchase price, and thus higher monthly payments, could jeopardize this ratio.

VA Loans:

• VA loans use a residual income method to determine affordability, meaning they look at how much income remains after all monthly obligations are paid. Higher loan payments could impact whether the borrower meets the residual income requirements, especially in higher-cost areas.

Conventional Loans:

• For conventional loans, lenders typically prefer a DTI ratio below 36% but may allow higher ratios depending on the borrower’s creditworthiness. Increasing the loan amount for the commission could push the DTI beyond acceptable limits, impacting loan approval.

5. Impact on Down Payment: When the purchase price increases, the down payment amount also increases if it is calculated as a percentage of the purchase price.

• For example, if the original purchase price is $400,000 and the buyer is putting down 10% ($40,000), raising the purchase price to $410,000 to include the commission would raise the down payment to $41,000. Buyers should be prepared for this potential adjustment.

FHA Loans:

• FHA loans require a minimum down payment of 3.5%. If the purchase price increases, even by a small amount, the buyer must increase their down payment accordingly to maintain that minimum percentage.

VA Loans:

• VA loans do not require a down payment, but if the purchase price increases to fold in commission, the buyer may still face closing costs, and any increase in the loan amount will need to comply with the VA loan limits (currently $726,200 in most areas for 2024 without requiring a down payment).

Conventional Loans:

• Conventional loans typically require at least 5% down for lower-risk borrowers, and increasing the purchase price to cover commission costs would require a larger down payment to maintain the same LTV ratio.

6. Borrower Ratios:

• A higher purchase price can affect the loan-to-value (LTV) ratio. Lenders typically want to keep the LTV within certain thresholds (e.g., 80% for a conventional loan). Raising the purchase price while keeping the same down payment could increase the LTV, which might trigger the need for private mortgage insurance (PMI) or less favorable loan terms.

• The higher loan amount might also push the buyer’s DTI ratio beyond acceptable limits for the lender, reducing borrowing capacity or requiring more income verification.

FHA Loans:

• The maximum LTV for FHA loans is 96.5%. If the purchase price is raised significantly, the buyer must ensure their down payment keeps the LTV below this threshold.

VA Loans:

• VA loans are more lenient with LTV. VA allows up to 100% financing of the appraised value, so buyers may not need to worry about LTV in the same way as with conventional loans, but the appraised value must still support the increased purchase price.

Conventional Loans:

• Conventional loans generally aim for an 80% LTV to avoid PMI. Raising the purchase price for the commission may push the LTV above 80%, requiring PMI or additional costs to cover the higher ratio.

Additional Considerations Regarding Buyer’s Agent Commission:

1. Buyer Agent Commission Structure:

• In most real estate transactions, the seller typically pays the buyer’s agent commission as part of the closing costs from the proceeds of the sale. As a result, there is usually no need for the buyer to roll the commission into the mortgage.

2. Lender Restrictions:

• Lenders generally do not allow direct financing of real estate commissions (whether buyer’s or seller’s agent) into the mortgage. The loan is based on the appraised value or purchase price, and commission fees are not typically included in that calculation.

3. Negotiation Workaround:

• While direct financing of the buyer’s agent commission isn’t standard, there are negotiation strategies where the purchase price is raised to cover commissions, but this must be disclosed to all parties (including the lender). Even in such cases, the increased purchase price must still pass the appraisal.

Summary: It is legal to increase the purchase price to cover a buyer’s agent’s fee, but it requires negotiation with the seller and approval from the lender. The appraisal and lender guidelines will play a critical role in determining whether this arrangement is feasible. Additionally, FHA, VA, and conventional loans all have specific rules regarding how the increased purchase price impacts down payments, borrower ratios, and whether commission fees can be included in the loan. Borrowers should also understand that rolling commissions into a loan is rare due to lender restrictions, but it may be negotiated indirectly by increasing the purchase price—provided it appraises accordingly.

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