VA Loans Don’t Cover Commissions. How Will Veterans Afford New Fees?

A recent landmark settlement that could significantly change how real estate agents are paid could also have an adverse effect on a sector of potential homebuyers who often rely on government-backed mortgages: military veterans.

The National Association of Realtors agreed to change its rules to settle a multitude of legal claims from home sellers who argued that the trade group’s policy on commissions forced them to pay excessive fees.

But there are also concerns that veterans will now opt to go unrepresented at the bargaining table because the Veterans Affairs loan prevents them from paying a commission to a buyer agent.

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What is the Veteran Affairs loan?

The Veterans Affairs loan, or VA loan, is a privately funded mortgage backed by the U.S. Department of Veterans Affairs that is best known for allowing veterans to purchase a home with no down payment. The loan was created in 1944 as part of the GI Bill of Rights, and it often comes with unwarranted stigma — they were once considered more complicated and harder to close than conventional loans, but the process has long been streamlined, with many of the bureaucratic hurdles that sellers worried about having long been eliminated.

About 28 million military veterans have used the loan since 1944.

What does the VA loan say about agent commissions?

One of the rules of the VA loan is that borrowers who use it aren’t allowed to pay commission to their real estate agents when buying a home — a mandate designed to shield them from additional costs. And until the NAR settlement, this was rarely an issue, because of how commissions have long been paid: In the United States, most agents specify a commission of 5% or 6%, paid by the seller. If the buyer has an agent, the seller’s agent agrees to share a portion of the commission with that agent when listing the home on the market.

But when the NAR settlement goes into effect in July, pending a judge’s approval, those offers of commission are likely to go away, thanks to changes to a key rule that a jury decided was anti-competitive. And without seller agents splitting their commission with buyer agents, buyers who use a real estate agent will now be expected to pick up the bill for their own agents’ services.

For VA borrowers, this isn’t possible.

“Buyer commission is now going to be part of the conversation in a way that it hasn’t been in decades,” said Chris Birk, vice president of mortgage insight at Veterans United, the country’s largest VA lender. “There’s still a lot of uncertainty about how this ultimately plays out in guidelines and in practice for veteran homebuyers.”

Some agents specialize in military buyers. Those agents say the rule change has them uncomfortably stuck between a rock and a hard place.

“I was livid when I heard about this,” said Jonathan Myers, a broker in Jacksonville, North Carolina, home to the Marine Corps Base Camp Lejeune and Marine Corps Air Station New River. He estimates that 80% of his clients are military. “We now have two choices. We can either cut our commission to ensure we look out for the veteran or we can hold the veteran to the contract and make them pay the difference.”

Does the government have a plan in place to respond to the rule changes in the settlement?

Not yet, but the Department of Veterans Affairs is having conversations with the Justice Department and key real estate industry leaders to “determine any potential implications for veteran borrowers related to this proposed settlement,” Terrence Hayes, the VA press secretary, said in an email.

Hayes added that the VA and Justice Department were working together “to help ensure that veterans are neither overcharged for broker commissions nor otherwise disadvantaged in the home-buying process.”

“We will continue to monitor this very closely, and we will take steps as needed,” Hayes added.

Birk, from Veterans United, said there are a number of potential workarounds being considered to deal with the rule change, including the possibility that the Department of Veterans Affairs would make buyer commissions a fee that veterans are allowed to pay.

NAR is the professional organization that represents the real estate industry. How is it responding to the rule changes?

NAR, which agreed to the terms of the settlement on March 15, has reached out to the Department of Veterans Affairs to change its policies on VA loans, a process that requires coordination with the Department of Justice.

The group’s president, Kevin Sears, sent a letter on March 27 to the VA’s executive director, saying NAR was committed to working with the VA to find solutions in the wake of the settlement.

“In this exceedingly competitive market, we are concerned that the VA’s current policies place veterans at a significant disadvantage compared to traditional buyers,” Sears wrote.

How are military buyers responding?

Some are concerned.

Others, like Heath Campbell, a retired air control electronics operator who now runs a martial arts studio in Jacksonville, North Carolina, acknowledge they weren’t aware of the settlement and its potential impact.

Campbell and his husband have been thinking about selling their house in Richlands, North Carolina, which has more than doubled in value since they bought it in 2012, and purchase a new property closer to his work. He would like to use his VA loan when he buys, he said, and despite the fact that more than a quarter of Jacksonville residents have a tie to the military, they were unaware of the settlement news.

“I’ll be honest with you. We don’t deal with a whole lot of social media personally other than business. We don’t have cable. We don’t even watch TV,” he said.

As the news spreads, however, some agents are trying to think creatively. Joe Knipp, a retired Naval Surface Warfare Office who now owns G.I. Joe Homes, a Northern California brokerage that exclusively serves military buyers and sellers, said he has been hatching potential solutions with his brokerage team. They are looking into the possibility of converting his company into a real estate law firm that could charge legal fees rather than commissions. The VA loan does not prohibit the payment of legal fees.

Other agents who specialize in military buyers say their biggest concern is that veterans will simply opt to not use an agent.

“What’s likely is you’re going to see a lot of people going unrepresented, and you’ll see the market shift to more agents who are working just with sellers because that’s where they can ensure they’re getting their commission,” said Deonte Cole, a retired Marine Corps veteran who now works as a broker in Tampa, Florida. “It’s creating a tougher situation for the buyer.”

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