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12
Biggest shakeup in a century set to hit real estate agents this week: Here's how they're preparing
Realtors across the US are bracing for a seismic shift in the way they do business. Starting August 17, new rules will roll out that overhaul the way Realtors get paid to help people buy and sell their homes.
The changes, which are part of a $418 million settlement announced in March by the powerful trade group the National Association of Realtors, eliminate informal rules that propped up the industry's traditional payment structure, where home sellers were typically on the hook to pay a 5% or 6% commission, usually split between their agent and the agent representing their home seller.
In the months since the settlement was announced, Realtors across the country have been preparing for the change, attending trainings and poring over the details of new contracts they must sign with prospective homebuyers. Some agents predict the rules will pave the way for new business models and potentially drive many full-service Realtors to leave the industry, while others are more sanguine about the impending changes.
"This is a grand social experiment in an industry at scale," Leo Pareja, CEO of eXp Realty, one of the largest real estate brokerages in the US, said. "I'm bracing my agents for what I call the 'messy middle.' I fully expect a lot of confusion."
In a statement, NAR's president, Kevin Sears, said he was confident NAR members would adapt to the changes, which industry analysts have called the biggest change in America's real estate market in a century.
"These changes help to further empower consumers with clarity and choice when buying and selling a home," Sears said. As August 17 nears, "I am confident in our members' abilities to prepare for and embrace this evolution of our industry and help to guide consumers in the new landscape."
What's about to change?
Historically, a seller's agent charged homesellers a fee, often 5% or 6% of a home's purchase price, that was intended to be shared with the buyer's agent. That meant that homesellers could be on the hook for serious cash: A seller of a $1 million home might pay out $60,000 in commissions. Some experts have said that money was baked into homes' listing prices, inflating the price of homes for sale.
A series of lawsuits alleged this standard practice violated antitrust laws, though the NAR has long argued that the commissions were always negotiable.
Along with a monetary payout, the NAR agreed to two key rule changes as part of an agreement to settle the lawsuits. Both take effect on August 17 and are designed — in theory — to shake loose the standard way of paying out commissions.
A judge granted preliminary approval of the NAR's settlement in April, but the final approval hearing is scheduled for November 26.
The first change prohibits agents' compensation from being included on multiple listing services, which are centralized databases used by Realtors to share details about homes for sale. Compensation details can still be advertised elsewhere or communicated in person or over the phone, though.
The second change requires buyers' agents to discuss their compensation upfront. Come August 17, agents working with a prospective homebuyer must now enter into a written buyer agreement before touring a property together. This agreement is designed to inform buyers that they are responsible for paying their own Realtors if a seller chooses not to cover the cost.
However, prior to the changes, Realtors in 18 states were already required to sign buyer agency agreements. Mary Schumann, a Realtor in Minnesota, said that to her, NAR's changes seem manageable.
"I always tend to wait and see how things shake out before I panic," Schumann said. "We already do buyers agreements here, and this doesn't seem to be incredibly different."
Newer business models see an opportunity
By some estimates, real estate commissions could fall between 25% to 50%, according to a March analysis by TD Cowen Insights. This could pave the way for real estate companies with alternative business models, like flat-fee and discount brokerages, to thrive.
Shelly Cofini, the chief strategy officer at Redy, said she believed the NAR settlement would benefit her company. Redy, which operates nationwide, is a marketplace that allows real estate agents to bid on home listings, meaning agents could pay homesellers for the opportunity to represent them, cutting into their own commissions.
"This is part of this notion of shifting how real estate is always done," Cofini said. "Because agents are in control of the proposal process, they decide on the cash incentive they'll offer and they decide on the commission structure they're willing to offer."
Companies are seeking to capitalize on the impending changes in other ways, too. Flyhomes operates as a traditional real estate brokerage, but earlier this summer, the company launched an AI chatbot designed to answer questions that a homebuyer might traditionally ask their Realtor.
"Consumers don't know this is coming," Flyhomes' chief strategy officer, Adam Hopson, said of the NAR changes. "When they decide they want to buy a home and they find they have to sign a contract, they may say, 'whoa, what is this?' We think this will drive them to find information from other sources. We will be one of those sources."
Will more Realtors call it quits?
Under the old standard, buyers often got representation for free, since their agent's commissions came from the homeseller's pocket.
Many Realtors who spoke to CNN said they believe the new set of rules will reward more experienced Realtors and shut out younger agents, since homebuyers may be wary of signing a legally binding agreement that ties them to a more inexperienced Realtor.
At 19, Madison Mathias, a Realtor in Chapin, South Carolina, said she has had to work overtime to dispel preconceived notions about her age to prospective clients, often re-reading contracts at night to ensure she has the details memorized.
Mathias said she thinks some Realtors will leave the industry, but she doesn't believe age will be a factor.
"I think more agents will fall off because some people don't like change," she said. "Being a new agent, I have had some people question me, but I've never had somebody not want to work with me because of my time in the business. It's all about confidence and educating yourself."
"I'm not really worried about it too much," she added.
Article belongs to CNN.com
12
How to get the best mortgage rate
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Key takeaways
- To help get the best mortgage rate, you can work to boost your credit score, lower your debt and save up a sizable down payment.
- Getting the best mortgage rate can save you money on interest over the life of the loan.
- Shop around for the best mortgage rate with at least three lenders and compare quotes.
Mortgage rates are much higher than homebuyers would like. Fortunately for borrowers, there are ways to set yourself up to get the best possible mortgage rate, even in this high-rate environment. Here's how to shop for the best mortgage rate for your home purchase.
9 steps to get the best mortgage rates
As you consider your options, it's a good idea to set yourself up as best you can to ace the loan application and score the best mortgage rate. "There are three pillars: your credit score, your income (which is converted to a debt-to-income ratio) and your assets," says Josh Moffitt, president of Silverton Mortgage in Atlanta.
Ready to learn how to get the lowest interest rate on a mortgage? Follow this eight-step process.
1. Improve your credit score
Boosting your credit score is a great first step if you're wondering how to get a lower mortgage interest rate. A lower credit score won't automatically bar you from getting a loan, but it can make all the difference between getting the lowest possible rate and being hit with more costly borrowing terms.
"A credit score is always an important factor in determining risk," says Valerie Saunders, president of the National Association of Mortgage Brokers (NAMB). "A lender is going to use the score as a benchmark in deciding a person's ability to repay the debt. The higher the score, the higher the likelihood that the borrower will not default."
To be considered for a conventional mortgage, you'll generally need a score of 620 or higher. However, the best mortgage rates go to borrowers with the highest credit scores (usually 740 or above). In general, the more confident the lender is in your ability to repay on time, the lower the interest rate it'll offer.
To improve your score, pay your bills on time and pay down or eliminate those credit card balances. If you must carry a balance, make sure it's no more than 20 percent to 30 percent of your available credit limit. Also, check your credit score and report regularly and look for any mistakes. If you find any errors, correct them before applying for a mortgage.
2. Build a steady employment record
You're more attractive to lenders if you can demonstrate at least two years of steady employment and earnings, especially from the same employer. Be prepared to show pay stubs from at least the 30-day period before you apply for your mortgage and W-2s from the past two years. If you earn bonuses or commissions, you'll need to provide proof of that, as well.
It can be more difficult to qualify if you're self-employed or your pay is coming from multiple part-time jobs, but not impossible. If you're self-employed, you might need to furnish business records, such as P&L statements, in addition to tax returns to round out your mortgage application.
What if you're a graduate just starting your career, or back in the workforce after time away? Lenders can usually verify your employment if you have a formal job offer in hand, so long as the offer includes your income. The same applies if you're currently employed but have a new job lined up. Lenders might flag your application if you're switching to a completely new industry, however, so keep that in mind if you're making a major change.
Gaps in your work history won't necessarily disqualify you, but how long those gaps are matters. If you were unemployed for a relatively short time due to illness, for instance, you might be able to explain the gap to your lender. However, it can be tough to get approved if you've been unemployed for longer — like six months or more.
3. Save up for a down payment
Putting more money down can help you get a lower mortgage rate, particularly if you have enough liquid cash to fund a 20 percent down payment. Of course, lenders accept lower down payments, but less than 20 percent usually means you'll have to pay private mortgage insurance (PMI). PMI costs on average between 0.46 percent and 1.50 percent of the original loan amount annually. The sooner you can pay down your mortgage to less than 80 percent of the total value of your home, the sooner you can get rid of mortgage insurance, reducing your monthly bill.
If you're a first-time homebuyer and can't cover a 20 percent down payment, there are specific loans, grants and programs designed to help you purchase a property. Eligibility varies by program but is often based on things like your income and whether you're a first-time homebuyer.
4. Understand your debt-to-income ratio
Your debt-to-income (DTI) ratio compares how much money you owe to how much money you make. Specifically, it compares your total monthly debt payments against your gross monthly income.
A popular rule of thumb for lenders is to avoid mortgages that will require a payment of more than 28 percent of your gross monthly income. Your overall DTI should remain below 36 percent.
So, if you make $5,000 per month, you'll want a mortgage payment of no more than $1,400 ($5,000 x 0.28) and want to ensure your mortgage payment plus other debt payments remains below $1,800 ($5,000 x 0.36).
The maximum DTI for a conventional loan is 45 percent, and the maximum for FHA loans is 43 percent. However, there can be some exceptions if you meet certain requirements, such as having significant savings.
If you're struggling to get out of debt, there are several techniques that can help you pay it down quicker, including the avalanche and snowball methods.
Debt-to-income ratio calculator
A debt-to-income, or DTI, ratio is calculated by dividing your monthly debt payments by your monthly gross income.
Calculate your debt-to-income ratio5. Check out different mortgage loan types and terms
If you think you've found your long-term home and have good cash flow, consider a 15-year fixed-rate mortgage instead of the traditional 30-year fixed-rate mortgage. You'll pay more each month, but pay off your home sooner. Plus, you'll pay less in interest since interest rates on 15-year mortgages fall below those of other mortgage options. You can also go for a 15-year term if you're refinancing your current mortgage.
Alternatively, while rates are high, you might want to consider an adjustable-rate mortgage (ARM). With these types of loans, you'll start with a fixed rate for a set time (often five or seven years), which is typically lower than what you'd get with a fixed-rate mortgage. After this period ends, the loan switches to an adjustable rate (which means your rate can go up and down) for the remainder of the term. When that happens, or whenever rates fall, you could refinance an ARM loan into a fixed-rate mortgage.
Finally, you can see if you qualify for government-insured or -guaranteed loans, such as:
- FHA loans: Insured by the Federal Housing Administration, FHA loans are popular with first-time homebuyers since the minimum credit score and down payment requirements aren't as high as they are with conventional loans.
- VA loans: If you or your spouse have served in the military, you could consider a VA loan, which is guaranteed by the U.S. Department of Veterans Affairs. With this loan, there is no down payment requirement.
- USDA loans: Guaranteed by the U.S. Department of Agriculture, the USDA loan program is designed to help low- and moderate-income people in rural areas buy a home. There's no down payment needed, but your home must be in an eligible area, and your income cannot exceed a certain amount (based on your location and household size).
6. Consider paying mortgage points
If you're willing to pay a fee, you can buy your way to a lower interest rate using mortgage points. Each point costs 1 percent of your mortgage amount and typically reduces your interest rate by 0.25 percent. You can think of mortgage points as a form of prepaid interest.
For example, let's say that you have a $400,000 home loan with a 7 percent interest rate. If you want a lower rate, you could buy a mortgage point for $4,000 and knock your rate down to 6.75 percent.
However, buying mortgage points isn't right for everyone. Recouping the upfront costs takes around five years (or more), so this strategy isn't ideal if you plan on selling within a few years.
7. Take advantage of discounts and programs
Before locking in with a lender, search for any discounts or programs you may qualify for to help reduce your costs. For instance, many state and local governments offer reduced-rate mortgages or down payment assistance programs for qualifying first-time homebuyers. Also, many banks offer rate discounts based on whether you already hold accounts with them. Lenders may offer other temporary promotions in the form of closing cost credits or points on your loan.
8. Compare offers from multiple mortgage lenders
When shopping for the best mortgage rate, even for a refinance, do the necessary research to make sure you're getting the best deal. Don't accept the first rate you're quoted. It pays to shop around, a recent Freddie Mac study found. For a $300,000, 30-year mortgage, getting a 6 percent rate instead of a 6.5 percent one, for example, could save you nearly $1,200 a year, and nearly $6,000 over five years.
Check with your own bank or credit union but also talk to multiple mortgage lenders in person and explore options online. As you get more quotes, you'll notice that — even if the interest rates are comparable — these lenders' offers come with different fees, closing costs, private mortgage insurance premiums and more. By shopping around, you can choose the offer with the most favorable terms.
"Shop and compare based on the loan estimates received," says Saunders. "You wouldn't normally purchase a car without test driving it first. Test drive your loan before proceeding with your purchase."
Best mortgage lenders of 2024
The best mortgage lenders based on affordability, availability and borrower experience.
Learn more9. Lock in your mortgage rate
Sometimes the closing process takes several weeks, during which rates can fluctuate. After you sign the home purchase agreement and have secured your loan, ask your lender to lock in your rate. The service sometimes comes with a fee, but it often pays for itself, especially in the current volatile, high-rate environment.
How much could you save with a lower mortgage rate?
You know how to shop around for mortgage rates — but how much could it really save you? Check out the chart below to see how the savings can add up on a $350,000 home loan with a 30-year fixed mortgage.
| Mortgage rate | Monthly mortgage payment* | Total cost of the loan |
|---|---|---|
| *Includes only principal and interest | ||
| 8% | $2,568 | $924,543 |
| 7.75% | $2,507 | $902,679 |
| 7.5% | $2,447 | $881,010 |
| 7.25% | $2,388 | $859,542 |
| 7% | $2,329 | $838,281 |
As you can see, even a modest rate reduction could mean tens of thousands of dollars in your pocket over the life of your mortgage. By following the steps above, you can be well-positioned to secure the best possible rate and maximize your savings.
Other factors that affect your mortgage rate
Mortgage rates change often based on a few factors, including:
- Inflation and other economic conditions. While the Federal Reserve doesn't directly set mortgage rates, its policy certainly affects the cost of your loan.
- Treasury rates. Mortgage rates move with 10-year Treasury rates, which in turn are based on investor sentiment and economic trends.
Want to stay up-to-date with rate updates and get more tips on how to shop for mortgage rates? Get the latest with Bankrate's daily mortgage news stories and weekly analyses.
Next steps to close on your mortgage
Now that you know how to get the best mortgage rate, it's time to choose the best loan offer and rate and apply for the loan. Here is an overview of what you can expect during this process:
- Get your loan estimate: Within three days of applying, you'll get a loan estimate, which spells out the details of the mortgage. This includes a list of closing costs, but bear in mind these are only estimates, not the final numbers. If you have any questions about what's in your loan estimate, you can ask your lender for clarification.
- Undergo underwriting: Your lender's underwriting department will review your application to determine whether to approve your mortgage. During this time, you might be asked to provide more documentation or answer questions, so be prepared and responsive. Maintain your financial and employment situation, too — don't apply for any new credit cards or loans, make large purchases or switch jobs, if you can help it.
- Wait for approval: If your mortgage is approved, you'll be on your way to closing. If your mortgage is denied, it's important to find out what influenced the decision. Generally, you can reapply for another mortgage with another lender as soon as you want to, but it might make sense to wait for a few months so you don't harm your credit.
As you near your closing date, you'll receive a closing disclosure with the finalized loan terms, including your interest rate, and closing costs. Be sure the rate in this document matches the figures you were originally quoted. Keep in mind rate locks usually only apply for a set time, so it's best to work with your lender to avoid delays on the road to closing.
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