Can a Real Estate Agent use their Commission as Down Payment When Purchasing a Home?
Down payment requirements can keep many would-be homeowners from entering the real estate market, but one solution is to get a gift from a real estate agent in the form of their commission.
This process can seem complex, but with the right documentation and preparation, it may help you acquire the down payment you need to finally become a homeowner.
Note: Commissions are classified as “gifts” in real estate transactions, so through this article, we will simply refer to them as gifts.
Gift From a Real Estate Agent: Can it be Used for a Down Payment?
When Can a Real Estate Agent’s Commission be Used?
Buyer’s Agent Commission
One situation when it is possible to use a gift from a real estate agent is when that gift comes from the buyer’s agent, but not the seller’s. According to the Department of Housing and Urban Development, commission from the buyer’s portion of the real estate commission that is earned on the sale of the property can be used as the borrower’s down payment. This will be an acceptable part of the borrower’s sources of funds, but the real estate agent must be fully trained and licensed.
The other situation when a portion of the commission can be used is when the real estate agent is a family member. Family members will need to give gifts in compliance with the standard gift-giving procedures. The lender will also need to verify and document that the borrower or the family member who is giving the gift is a licensed real estate agent that is entitled to a real estate commission from the sale.
Gift Funds from Realtor: Some Examples
Say there is a real estate agent whose adult child wishes to purchase a home. The agent will represent the buyer in their purchase, and wants to give all of her commission as part of the down payment. In this case, the realtor commission can be used as a down payment. This funding can be used towards some or all of the down payment. For example, if the down payment is $5,000, and the commission will be $4,000, the agent can gift the commission, leaving the borrower with only $1,000 in down payment requirements.
This type of situation can be used to help a buyer purchase a home, and many agents may choose this option to help them gain a commission, even if that commission is smaller. Although they will not get their entire commission, many see it as an advantageous situation and may offer it to their clients.
An agent can also use a commission towards their own down payment. Let’s say a real estate agent is going to purchase a newly-build house. The loan being used is at the top of the FHA guidelines for loan-size limits, but the agent does not have the entire 3.5% down payment requirements for the FHA loan, so the agent promises to use his commission from the sale of the property to fund the down payment. With a 2.5% buyer commission, only 1% of the down payment is left. This is a much more manageable amount for agent/buyer to generate.
Tips for Using a Gift From a Real Estate Agent for Your Down Payment
Get a Signed Statement from Agent
You can get help from relatives and real estate agents, but you need to make sure that everything is properly documented and that all the required forms are completed. You’ll likely need a signed statement from the agent saying that he or she will give you a gift in the form of their commission, and that this gift is to be used specifically for the down payment. The letter will need to include contact and general information on the giver, including their name, number, address, and any other important contact information. It will also need to include their relationship to you if any exists beyond the basic agent-buyer relationship. The letter should also include the dollar amount and expected date of sale.
Be Sure it’s a Gift, Not a Loan
It also important to you verify that the money being given is not a loan, but is in fact a gift. There can, on rare occasions, be confusion on the nature of the money being given, and if this happens, it’s usually caused by basic miscommunication and misunderstanding. Discuss with the agent the nature of the money being given and verify, in clear wording, that it is in fact a gift. (It never hurts to have this information in writing.) It might be an uncomfortable conversation, especially if the agent is a family member, but having this conversation will make a big difference in the future.
Ask for a Paper Trail of the Gift
Lenders will want to see a clear path of how the money will go from the agent to your account. They will want evidence that the money that will match the amount stated in the provided documents. Depending on the lender, they may require financial information from the real estate agent. This is sometimes requested in order to verify that the gift giver is able to part with the money and not experience significant financial burden.
Tell the Lender About Any Changes in the Plan
Suppose you start the process with an assumption that the real estate agent will gift $3,000 of his commission towards your down payment. Then he feels more generous and decides to give you $4,000. Be sure to tell your lender about this change, and be sure to document the change and verify the new amount. Lenders always want to know what’s going on as soon as possible, so communicate any changes right away.
Understand the Potential Limits
According to the tax code and real-estate lending guidelines, there are limits to the amount that can be given, and certain gifts may be subject to a tax penalty. These rules and laws can also change depending on the area where you live, so make sure to speak with a knowledgable real estate professional who can help you understand any limits or barriers to receiving a gift from a real estate agent.
Your Source for Reliable Lending Information
Contact the team at San Diego Purchase Loans and we’ll make sure you have all the right information for your home purchase. With a common-sense approach to lending, we are your source for affordable, reliable mortgage-loan approval!