Can You Finance The Buyer Brokers Fee?

INDUSTRY
Financing A Buyer Agent Fee

💰 Understanding the Concept

In today's Buyer-Broker agreement housing market, many realtors and loan officers are being asked if borrowers can finance the buyer's agent fee into their mortgage. The short answer is: technically, yes, but the details matter, and it might not be as straightforward or advantageous as it seems.

🏦 How It Works

Some loan officers are suggesting that borrowers can effectively "finance" the buyer's agent fee by reallocating a portion of their down payment. Here’s how it works:

1. Reallocation of Funds:

   • For borrowers putting down a down payment of 10% or more, part of that down payment can be allocated towards paying the buyer’s agent fee instead of going directly towards the down payment.

2. Similar to Appraisal Gap Coverage:

   • This approach is similar to what happens in a short appraisal scenario. If the appraisal comes in lower than the purchase price, borrowers might allocate part of their down payment to cover the appraisal gap while keeping the overall cash outlay the same.

3. Example Scenario:

   • Consider a borrower purchasing a home for $840,000 with a 10% down payment ($84,000). If the buyer's agent fee is 3%, or $25,200, the borrower could reduce their down payment to $58,800 and use the $25,200 to pay the fee. The total amount they bring to the table remains $84,000, but the down payment percentage drops to 7%.

📉 Potential Drawbacks

While this strategy might seem appealing, especially in a hot market where buyers are looking for an edge, there are significant drawbacks:

1. Impact on Loan Type and Interest Rate:

   • By reducing the down payment from 10% to 7% on an $840,000 home, the loan amount increases from $756,000 to $781,200. This pushes the borrower over the conforming loan limit into a high-balance loan category, which typically comes with a higher interest rate. The combination of a larger loan amount and higher interest rate can significantly increase the borrower’s monthly payment, compounding the cost over the life of the loan.

2. Effect on Debt-to-Income (DTI) Ratios:

   • A higher loan amount means larger monthly payments, which can raise the borrower’s DTI ratio. This could push some borrowers beyond the lender's maximum allowable DTI, potentially disqualifying them from the loan or limiting their options.

3. Increased Costs:

   • The larger loan amount, coupled with the higher interest rate, means more interest paid over the life of the loan. Even if the monthly payment difference seems minor, the long-term costs can be substantial.

⚠️ Considerations Before Proceeding

Before advising clients to pursue this option, it’s crucial to consider the long-term financial implications:

• Loan Qualification: Ensure that reallocating the down payment won’t affect their ability to qualify for the loan.

• Interest Rate Impact: Discuss how a shift from a conforming to a high-balance loan could affect their interest rate and overall loan costs.

• Long-Term Costs: Explain the increased interest costs over the life of the loan.

🎯 Final Thoughts

While financing the buyer's agent fee by reallocating the down payment might be a viable option for some borrowers, it’s not a one-size-fits-all solution. This strategy can be particularly disadvantageous for low down payment borrowers or those with tight DTI ratios. It’s essential to thoroughly evaluate each borrower’s unique financial situation and consider all possible outcomes before proceeding with this approach.