What Is a Home Buyer Rebate? (Commission Rebate)

Are home buyer rebates legal?

Home buyer rebates are legal in most states across the United States, offering a valuable way for buyers to save money on their home purchase. However, there are a few states where these rebates are restricted or not allowed. It’s important to be aware of your state’s regulations regarding home buyer rebates before entering into a rebate agreement with your real estate agent. The nine states that still have laws prohibiting or limiting these rebates include:

• Alabama
• Alaska
• Iowa*
• Kansas
• Mississippi
• Missouri
• Oklahoma
• Oregon
• Tennessee

*Iowa prohibits rebates when two or more agents are on a transaction.

Because there are ongoing efforts by the DOJ and other groups to make home buyer rebates legal in all states, the list above can change. Consult with a real estate professional or legal advisor in your state to get the most current information.

Why does my lender need to approve a buyer rebate?

Lender approval is necessary for home buyer rebates because the rebate can affect the financial aspects of your mortgage agreement. Lenders need to ensure that the rebate is applied appropriately, either as a credit toward closing costs or deducted from the purchase price, and that it doesn’t impact your loan-to-value ratio in a way that could affect loan approval.

Additionally, lenders must confirm that the rebate complies with federal and state laws, as well as with the policies of the lending institution. This approval process helps protect both the lender and the buyer, ensuring the transaction remains transparent and within legal boundaries.

Rebate vs. first-time home buyer credit

While both home buyer rebates and first-time home buyer credits offer financial benefits, they serve different purposes and come from different sources. A home buyer rebate is a portion of the real estate agent’s commission returned to the buyer, often as a negotiation incentive. In contrast, a first-time home buyer credit is typically a government incentive aimed at encouraging homeownership among first-time buyers. This credit might come in the form of tax breaks or direct financial assistance, and eligibility requirements must be met to qualify.

‘Cash back’ vs. ‘Closing credit’

The terms “cash back” and “closing credit” refer to how a rebate is applied at the time of purchase. “Cash back” means the buyer receives a direct payment after closing (in states that allow this). On the other hand, “closing credit” is applied directly to the closing costs of the home purchase, reducing the amount the buyer needs to bring to the closing table. Both methods offer financial relief, but the application and impact on the transaction can differ. It’s important that the rebate method is spelled out in the settlement document.

Why do some agents offer home buyer rebates?

Agents offer home buyer rebates for several reasons. Primarily, it’s a competitive strategy to attract more clients in a crowded market. By sharing a portion of their commission, agents can differentiate themselves from competitors, offering tangible value to potential clients. Rebates can also foster goodwill and lead to positive referrals, helping agents build their reputation and expand their business. Ultimately, rebates are a marketing tool that benefits both the buyer and the agent.

Can I use a buyer rebate as my down payment?

In most cases, you cannot use your rebate as part of your down payment. Lenders typically require down payments to come from the buyer’s own funds or as a gift from a family member, not from transaction-based rebates. However, a rebate can often be applied to closing costs or might be allowed to buy down the interest rate, indirectly reducing the amount of cash a buyer needs at closing. It’s essential to discuss this with your lender early in the homebuying process to understand what’s possible and ensure compliance with lending guidelines.

Is a home buyer rebate taxable?

The tax implications of a home buyer rebate can be complex and depend on how the rebate is applied and the specific tax laws in place. State tax laws governing rebates also vary. Generally, if the rebate is applied to closing costs or the purchase price, it may not be considered taxable income by the IRS. However, if the rebate is given to the buyer in cash after closing, it could be viewed differently. It’s crucial to consult with a tax professional to understand the tax obligations associated with your home buyer rebate, ensuring compliance with current tax laws and regulations.

How do I get a home buyer rebate?

Securing a home buyer rebate typically involves a few steps:

• Research and select an agent: Start by finding real estate agents in your area who offer rebates. This information might be available on their websites, or you can directly inquire about rebates during initial consultations.
• Discuss the rebate early: Once you’ve selected an agent, discuss the terms of the rebate upfront. Ensure you understand how the rebate will be calculated, when it will be paid, and any conditions that apply.
• Formalize the agreement: Make sure the details of the rebate are included in your representation agreement with the agent. This formalizes the arrangement and protects both parties.
• Stay informed about regulations: Be aware of your state’s laws regarding rebates and discuss with your agent how to comply with these laws throughout the buying process.

Work with a top agent for the best results

Working with a top real estate agent not only increases your chances of securing a valuable home buyer rebate but also ensures you have an expert guiding you through the complexities of the homebuying process. A top agent offers in-depth market knowledge, negotiation skills, and personalized advice, helping you find the right home at the right price — and potentially saving you thousands through a rebate or through expert negotiations.

Remember, the best results come from partnering with a professional who understands your needs and the intricacies of the real estate market. Whether you’re buying or selling — or both — HomeLight can connect you to top agents in your selected market.

Header Image Source: (Jarek Ceborski / Unsplash)