Apparently, there is a big retail trend known as “Buy Now, Pay Later.” It works by you going to a store and making a down payment. Then, you get to take what you are buying, and they set you up on a payment plan.
These programs don’t show up on your credit, which seems great. The problem in the lending world is that Buy Now, Pay Later does show up on your bank statements because you are making the payment. Fannie and Freddie are saying that the responsibility is on the lenders to find this and make sure it’s being accounted for in the calculations.
How Buy Now, Pay Later Affects Mortgages
Basically, if we look at bank statements and see a recurring payment to whatever company (Apple, PayPal, etc.), then we’ll ask what it is. If it is a Buy Now, Pay Later, then it’s ok, because we can actually omit the payment and not include it in the debt-to-income ratio. But only IF the borrower can produce written documentation showing exactly how many payments are left, and there are less than 10 payments remaining.
On these types of programs, it’s going to be a question of whether you will be able to document this. The majority of these transactions happen quickly at a checkout counter, which means that you may not even get documentation.
If you can’t provide reliable documentation, then we have to include this payment in your debt-to-income ratio, which can affect your lending options when buying a home. It’s going to cause issues for some people who are already close on their debt-to-income ratio, because adding this extra payment could push you out of qualifying for the mortgage.
Close On Your House First Before Other Big Purchases
Note to self for everyone in the real estate business: This is another question we need to start asking clients. Are you part of any Buy Now, Pay Later programs? At Franklin Loan Center, we are asking all of our clients about this upfront.
Another thing to consider is if you are in the market to buy a house and thinking about buying anything through this type of program (such as new furniture), do not do that! If you are going to do it, make sure that you get a written document showing that you have less than 10 payments. Or, wait until you’ve closed on the house and moved in first.
I’m sharing this because these Buy Now, Pay Later programs aren’t as harmless as they appear. They are easy to sell at the cash register, but the payments will have an effect when the underwriter is reviewing your financial information.
For personalized mortgage recommendations, I’m always here to help. Reach out any time!