The South Coast Real Estate Round-Up

In recent years, Buy Now, Pay Later (BNPL) services have surged in popularity, allowing consumers to split purchases into smaller, interest-free payments. While this may seem like a great way to manage expenses, many home buyers don’t realize how BNPL loans can impact their ability to secure a mortgage. If you’re planning to purchase a home, it’s essential to understand how these short-term financing options can affect your credit profile and mortgage approval.

BNPL and Your Credit Score

Most BNPL providers do not report on-time payments to the major credit bureaus, but missed payments can be reported and negatively impact your credit score. Additionally, some lenders consider BNPL loans as a form of debt, which can increase your debt-to-income (DTI) ratio—a key factor in mortgage qualification.

Increased Debt-to-Income Ratio

Mortgage lenders assess your DTI ratio to determine how much of your income is already committed to debt payments. Even though BNPL payments are often small, multiple BNPL loans can add up, making your financial obligations appear higher than they actually are. This could lead to a reduced mortgage approval amount or even a denial.

Potential Impact on Credit Inquiries

Some BNPL services conduct hard credit inquiries when approving financing, which can temporarily lower your credit score. If you’re actively shopping for a home, multiple inquiries could raise red flags for mortgage lenders, potentially affecting your loan terms.

Managing BNPL Before Applying for a Mortgage

If you’re considering purchasing a home in the near future, here are some steps to minimize the impact of BNPL loans on your mortgage approval:

• Pay Off Outstanding BNPL Balances – Reducing outstanding balances can help lower your DTI ratio and present a stronger financial profile.
• Avoid Taking on New BNPL Loans – If you plan to apply for a mortgage soon, hold off on new BNPL purchases to avoid unnecessary debt and credit inquiries.
• Monitor Your Credit Report – Regularly check your credit report to ensure all reported debts are accurate and to address any issues before applying for a home loan.
• Work with a Mortgage Professional – A knowledgeable mortgage advisor can help assess your financial situation and provide guidance on how to position yourself for loan approval.

The Bottom Line

While BNPL services can be a convenient way to finance everyday purchases, they can also create unintended obstacles when applying for a mortgage. Home buyers should be mindful of how these short-term financing options influence their overall creditworthiness and borrowing power.

At E Z Home Search Real Estate, we’re here to guide you through every step of your home-buying journey. Join us at our next FREE Online Home Buyer Webinar where we will review the 5 Most Common (and Costly) Home Buyer Mistakes and How to Avoid Them and if you have questions about how BNPL or other financial decisions may impact your ability to secure a mortgage, reach out to us today!