Everyone knows that Buy Now, Pay Later (BNPL) loans are all over the place at this point.
Whenever you buy anything online, you are given the option to pay it back in installments instead of all at once.
Even small purchases of $100 or less can be broken down into monthly payments. This pressures the consumer to perhaps move forward when they shouldn’t.
The problem is that these BNPL loans can start compounding and suddenly, you are paying hundreds a month in total.
And although they are often not reported to the credit bureaus, at the momentmortgage underwriters can find and review your home loan application.
BNPL loans can jeopardize your Mortgage application
Although BNPL loans are very common, they are not yet secure enough to make it onto credit reports, at least consistently.
There have been reports of BNPL companies starting to send data to credit bureaus, such as Affirm now reporting to Experian and Apple Pay Later going to consumer credit reports as well.
But it’s not clear that it actually affects credit scores, especially since most versions of FICO scores don’t seem to include the data.
In fact, FICO recently said that two credit scores powered by BNPL, FICO Score 10 BNPL and FICO Score 10T BNPL, are now available test.
That means mortgage lenders are not using these yet and are relying on older models that may not apply to BNPL loans.
And that’s if the BNPL suppliers even report the initial data!
So for now, you probably don’t have to worry about these loans affecting your credit score and thus hurting your loan chances.
In time, this can be a real possibility, especially if you are a BNPL loan user.
How Mortgage Underwriters View BNPL Loans Right Now
Currently, many BNPL loans do not even go on credit reports, although they are increasingly being reported.
Even if they aren’t, there’s a good chance the mortgage underwriter will find out anyway.
Because they may ask for recent copies of your bank statements, which include these payments.
The good news is that even if they get proof of a BNPL loan, they can usually be deducted from your DTI rating.
Why? Because Fannie, Freddie, VA, and FHA all allow these loans to be discharged. For now at least.
However, you still have to put it in writing to prove that there are 10 months or less of outstanding payments, which can be a burden.
Also having a BNPL loan can still jeopardize your mortgage approval if the amounts are large enough and/or you have limited savings.
Imagine you have 10 BNPL loans totaling $500 a month or more. The underwriter may start to worry that you may have trouble meeting your obligations.
Especially if you have other risk factors, such as poor credit or a low down payment.
Sometimes, these loans will be very important and affect credit scores.
It’s also possible that the likes of Fannie, Freddie, and the FHA could end up saying you know what, these loans shouldn’t be taken out.
Credit agencies may also find that regular BNPL users are serious credit risks so they should have low credit scores.
Finally, don’t forget lender overlap, where certain banks or lenders set their own rules to reduce risk.
It is possible that the bank you do business with has decided that the BNPL loan should be included in your DTI balance, thus reducing your ability to pay.
It May Be Best to Avoid Using BNPL Loans Before Buying a Home (or Refinancing)
The takeaway is that there is still a lot of uncertainty in the BNPL space, even if mortgage lenders are looking the other way right now.
As noted, that could change as more courses are completed and loan reporting becomes more common.
Over time, these loans can affect your credit score (in a bad way), potentially pushing your average score below the primary limit, resulting in a higher loan balance. Or deny it altogether.
One also needs to consider their spending habits going into a major life decision like buying a home.
If you are accumulating debt through BNPL loans, you may not be ready to take the plunge into home ownership just yet.
