In August 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement, fundamentally altering how real estate agents are compensated in the U.S. This shift aims to enhance transparency and empower consumers in the homebuying process. Today, we’re covering the basics of what agent compensation is, why it’s important, and how it affects the mortgage process and prospective buyers’ budgets when they are planning to buy a home.
Agent Compensation 101
Agent compensation in a real estate transaction typically refers to the commission paid to real estate agents for their services. This commission is usually a percentage of the home’s sale price (commonly 5–6%), which is traditionally covered by the seller and split between the listing and buyer’s agents.
Compensating agents on both sides of a real estate transaction ensures that each party—buyer and seller—has a dedicated professional advocating for their best interests. Agents bring valuable expertise in pricing, negotiations, contracts, and local market trends, helping clients make informed decisions. Fair compensation encourages high-quality service and accountability, ultimately leading to smoother transactions and better outcomes for everyone involved.
These recent changes now allow buyers to negotiate and pay their agent’s commission directly. This shift can impact a buyer’s mortgage strategy, as the commission may no longer be rolled into the home price and loan amount. Instead, buyers might need to pay the fee out of pocket, potentially reducing the cash they can put toward their down payment or closing costs, which are factors that can influence loan qualification and terms.
Key Changes in Agent Compensation
- Buyer Agent Commissions Are No Longer Seller-Paid by Default
Previously, sellers typically covered the total agent commission (often 5–6%), which was split between the listing and buyer’s agents. Under the new rules, sellers are no longer obligated to pay the buyer’s agent commission. Instead, buyers must negotiate and agree upon their agent’s compensation upfront, formalized through a written agreement before touring homes.
- Commission Offers Removed from MLS Listings
Multiple Listing Services (MLS) can no longer display offers of compensation to buyer agents. This change eliminates the previous practice where buyer agents could see commission offers and potentially steer clients toward higher-paying listings. Now, any compensation discussions occur directly between buyers and their agents, fostering a more transparent relationship.
- Mandatory Written Buyer Agreements
Buyers are now required to sign a written agreement with their agent before viewing properties. This contract must clearly outline the agent’s compensation, ensuring that all terms are transparent and agreed upon from the outset.
Implications for Mortgage Applications and Buyer Options
In a recent blog, we discussed what to expect during the mortgage process. Agent compensation changes could significantly impact buyers’ approaches to financing their home purchases.
- Out-of-Pocket Payments: Buyers may need to pay their agent’s commission directly, which could be an additional cost on top of the down payment and closing costs.
- Negotiating Seller Concessions: Buyers can negotiate with sellers to cover part or all of the buyer agent’s commission as a concession, although this is no longer standard practice.
- Adjusting Down Payments: Some buyers might choose to reduce their down payment to allocate funds for agent commissions, though this could affect loan terms and mortgage insurance requirements.
- Financing Through Lenders: Certain loan programs may allow buyers to finance agent commissions, but this varies by lender and loan type. For instance, VA loans have specific restrictions regarding buyer-paid commissions.
Depending on where you live, you may be eligible for a variety of grants, assistance programs, or local incentives designed to help reduce your down payment—freeing up cash that can be used toward agent compensation if needed. Many states and municipalities offer first-time homebuyer programs, forgivable loans, or matched savings plans that can significantly lower your upfront costs. Missouri, Illinois, and Kansas have programs to help with down payment costs.
Some programs even allow for layering multiple sources of assistance, making homeownership more accessible, even with the added responsibility of paying your agent directly. It’s a great idea to speak with one of our loan advisors who understands the programs available in your area and can guide you through which options you qualify for.
Navigating the New Landscape
While these reforms aim to increase transparency and consumer choice, they also introduce new complexities. Buyers must now be more proactive in understanding and negotiating agent compensation and consider how these costs fit into their overall homebuying budget. Connecting with knowledgeable real estate and mortgage professionals can provide valuable guidance through this evolving process.
Don’t let these new changes deter you from buying in this new market. At Homestead Financial Mortgage, we are here to keep you informed and are prepared to help you make confident and financially-sound decisions in your homebuying journey.