Homebuyers

Buy Now, Pay Later May Get in the Way of Your Mortgage Application

If you’ve ever been tempted to split your new television into four easy payments using a buy now, pay later (BNPL) platform like Klarna, Affirm, or Afterpay, you should know that those payments may have an impact on your mortgage application. 

Buy now, pay later platforms offer an appealing pitch. You may be able to purchase nearly anything and break up the overall cost into four to six installments. And there’s no credit check and often no interest fees. Seems ideal, right?

However, it’s important to know that using these platforms does create a debt in your name. Lenders may take that debt into consideration when determining your creditworthiness.

“Most people applying for a loan don’t even think about all these debts they have,” said Mosi Gatling, senior vice president of Strategic Growth and Expansion and loan officer at New American Funding. She is also a Las Vegas-based loan officer.

“Now people are taking out BNPL on everyday items, and they're paying on six to 10 different plans at a time,” she said. “When we factor that into their mortgage application, I have to tell them they have to pay them all off or factor it into their [debt when they are attempting to qualify for a loan.]” 

Buy now, pay later is still debt

One of the most important factors that lenders consider when evaluating a person for a mortgage is their debt-to-income ratio (DTI). This shows how much debt you have compared to your earnings.

Most debts that people have, like credit cards or car payments, will show up on their credit report and are considered as part of their DTI.

However, some of these BNPL payments don’t make it to credit reports, since they are auto-withdrawal for a short period of time. But those recurring payments are seen by lenders when they examine a potential borrower’s bank statements as part of the underwriting process.

As Gatling said, lenders then may need to factor that in when determining a borrower’s DTI. And those payments, whatever size they are, can make a big difference.

BNPL purchases could jeopardize your home loan application

Since the mortgage process requires several check-ins for bank statements, every new credit application, BNPL included, will eventually be discovered. If there are enough, it could jeopardize your home loan application. 

Although BNPL options aren’t inherently bad, homebuyers should have the money to cover purchases, even if they choose an installment plan, said Gatling.

Often, Gatling tells homebuyers they need to pay off all of their BNPL purchases before closing. 

She recommends buyers to think critically about what you’re using BNPL to purchase. If you are struggling to pay for basic expenses, you may not be in a position to get a home loan. And if you’re using BNPL for non-essentials, you may want to consider cutting back to help your credit score.

“[BNPL purchases] can thwart your attempt to get a home loan,” said Gatling

Mosi Gatling NMLS # 557166