Everyone knows Buy Now, Pay Later (BNPL) loans are pervasive at this point.
Anytime you buy anything online, you’re given the option to pay it back in installments instead of all at once.
Even a small purchase that’s $100 or less can be broken down into monthly payments. This pushes the buyer to perhaps move forward when they shouldn’t.
The problem is these BNPL loans can start to add up and all of a sudden, you’re paying hundreds per month in aggregate.
And while they often aren’t reported to the credit bureaus, yet, mortgage underwriters can still find them and scrutinize your home loan application.
BNPL Loans Could Jeopardize Your Mortgage Application
While BNPL loans are super common, they aren’t quite established enough to make their way onto credit reports, at least consistently.
There have been reports of BNPL companies beginning 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 unclear if it’s actually affecting credit scores, especially since most versions of FICO scores don’t seem to incorporate the data.
In fact, FICO recently said two new BNPL-enabled credit scores, FICO Score 10 BNPL and FICO Score 10T BNPL, are now available to test.
That means mortgage lenders aren’t using these yet and are relying on older models that likely don’t factor in BNPL loans.
And that’s if the BNPL providers even report the data to begin with!
So for now, you probably don’t have to worry about these loans affecting your credit score and thereby hurting your mortgage chances.
Over time however, this could be a real possibility, especially if you’re a frequent user of BNPL loans.
How Mortgage Underwriters Currently View BNPL Loans
At the moment, a lot of BNPL loans don’t even make their way to credit reports, though they are increasingly being reported.
Even if they aren’t, there’s a decent chance the mortgage underwriter will find out anyway.
Because they might ask for recent copies of your bank statements, which include these payments.
The good news is even if they do find evidence of BNPL loans, they can often be excluded from your DTI ratio.
Why? Because Fannie, Freddie, the VA, and the FHA all allow for these debts to be excluded. For now at least.
However, you still have to document it to prove there are 10 or fewer months of payments remaining, which can be a burden.
And the presence of BNPL loans can still jeopardize your mortgage approval if the amounts are large enough and/or you have limited reserves.
Imagine you’ve got 10 BNPL loans that total $500 per month or more. An underwriter might start to worry that you might have trouble meeting your obligations.
Especially if you’ve got other risk attributes, such as a marginal credit score or a low down payment.
At some point, these loans are going to matter more and affect credit scores as well.
It’s also possible that the likes of Fannie, Freddie, and the FHA could eventually say you know what, these loans shouldn’t be excluded.
The credit bureaus might also find that frequent BNPL users are bigger credit risks and thus should have lower credit scores.
Lastly, don’t forget lender overlays, in which specific banks or lenders impose their own rules to mitigate risk.
It’s possible a bank you do business with decides BNPL loans should be included in your DTI ratio, thereby limiting what you can afford.
It Might Be Best to Avoid Using BNPL Loans Prior to a Home Purchase (or a Refinance)
The takeaway is that there’s still a lot of ambiguity in the BNPL space, even if mortgage lenders are looking the other way right now.
As noted, that could change as more studies are completed and reporting of the loans becomes more commonplace.
Over time, these loans might affect your credit scores (in a bad way), potentially pushing your mid-score below a key threshold, resulting in a higher mortgage rate. Or outright denial.
One also needs to consider their spending habits going into a major life decision like a home purchase.
If you’re racking up debt via BNPL loans, perhaps you’re not ready to make the leap to homeownership just yet.
