Buy now pay later services, also known as BNPLs, allow consumers to pay off purchases over a fixed period in a series of interest-free installments (i.e. Klarna, Affirm, Afterpay and Quadpay). Although this has become popular among consumers, it’s important to look at the effect these services can have on your homebuying abilities.  

BNPL Considerations When Buying a Home  

  • Credit Score: According to Forbes, unlike applying for a new credit card, BNPLs are easier to qualify for, since your credit score is not weighed during application. These services could be more appealing for those who do not have a strong credit profile. Consequently, while some may believe that BNPL services could build credit, this is incorrect. BNPLs do not help build credit. If you’re looking to increase your credit score, review our blog, How to Increase Your Credit Score.” 
  • Budget: Splitting up your payments over time might make an expensive item more attainable. Additionally, payment plans can help manage cash flow since consumers are able to set a payment plan that fits their budget. On the other hand, BNPLs increases the risk of overspending and influences shoppers to make impulse purchases. If you decide to use this type of service, it’s important to budget accordingly. Need help creating a budget? Check out our blog on Home Budgeting Tips!  
  • Fine Print: According to NextAdvisor, review the fine print such as fees, interest and services before purchasing the item. Conducting research ahead of time will help avoid any fees you could incur from missed payments, and will help ensure this service is right for you!  

BNPLs and Homebuying Abilities 

Considering a home purchase? While BNPL services may not affect your credit, they could affect your homebuying abilities. BNPLs affect your debt-to-income ratio (DTI), and could (depending on the loan type) negatively affect your mortgage approval. Below we’ve outlined how these services could affect the four major loan products. 

  • Conventional: Typically viewed as the 20% down mortgage solution, conventional loans come in all shapes and sizes.  BNPL services would NOT have an impact on the borrower’s DTI – yay! 
  • VA Financing: Loan option for military veterans or active service members. Just like conventional loans, BNPL services would NOT have an impact on the borrower’s DTI.  
  • FHA Loan: Offers flexible guidelines for borrowers with limited down payment funds, and an imperfect credit history. If the monthly payment for the BNPL service exceeds 5% of the qualifying income, the payment WOULD be included in the DTI, which could affect the borrower’s ability to take on more debt with a mortgage. 
  • USDA Loan: USDA loans are government insured home loans for purchasing within a designated rural area. If the BNPL monthly payment exceeds 5% of the qualifying income this payment WOULD also be included in the DTI, just like an FHA loan. 

If you are thinking about buy now, pay later services review the advantages and disadvantages before making your final decision. Questions on how these services could affect your homebuying ability? Contact one of our expert Loan Officers