Finding your perfect home can seem like a dream come true. However, that dream can be suddenly dashed if the words “mortgage declined” is thrown your way. It’s a phrase no house buyer wants to hear, and whilst your initial reaction may be shock, disappointment and denial, there is often a reason as to why. Whether it’s down to poor credit score, no credit history, insufficient down payments or too much existing debt- mortgage providers have various legitimate reasons as to why they may reject your mortgage application. Recently, there has been a rise in prospective homeowners being turned down for mortgage applications due to their use of BNPL services such as Klarna and Clearpay. As there are questions circulating around the topic, we have decided to provide some answers.
What is a BNPL Service?
BNPL stands for Buy Now, Pay Later. It’s a type of credit payment that enables you to purchase items and pay for them either through installments or at a later date. Newer versions of BNPL services enable customers to shop online without having to pay straight away. Some of these include Klarna, Amazon, PayPal and Clearpay.
How do BNPL Services Affect Credit Score?
As BNPL is a form of credit, if it is overused it can negatively impact your credit score. This is due to the fact that you’re borrowing the price of an item or items for the delayed length of time before payment. While this may seem like a good idea in theory, if you fail to pay back what you owe, or miss a payment, it could be noted on your credit report. This mark could stay on your credit report for up to six years and lower your credit score.
Does BNPL Encourage Bad Spending Habits?
To a certain extent, you could argue that yes, BNPL services do encourage bad spending habits. This is due to the fact you see the service as an investment, and something that you will eventually have to pay back. The series of interest free payments makes larger expenses easier to cover as there typically isnt a credit check, and therefore you don’t need a good credit score to qualify for it. BNPL is popular with consumers as it allows them to pay for things without going into debt, and for retailers, it allows them to receive payments faster than they would from credit cards.
However, the flipside of BNPL is that it is the individual’s responsibility to ensure that they are not taking advantage of this service. The temptation of this service is at the disposition of the customer, so there must be an element of maturity and financial understanding towards BNPL.
Why Do Banks Reject Mortgage Applications Based on This?
Most banks recommend that all prospective homeowners do not enter any form of new credit agreements before they submit their mortgage applications. They should ensure all short-term debt is paid before application submission. Banks have confirmed that ongoing BNPL payment agreements are active throughout ongoing months, and therefore the individual(s) may not be able to make other monthly payments when affordability is due for assessment.
The fact that BNPL services allow consumers to spread the cost of their purchase over periods of time with interest free instalments means the concept is frowned up negatively.
How Do I Avoid Being Rejected?
The majority of mortgage advisors would suggest that using a credit card and paying the card off is perhaps more beneficial than using BNPL services. From a financial perspective, BNPL suggests that a person is living beyond their means, and the services are unregulated and over-reliant on debt, therefore, if you are considering applying for a mortgage it is worthwhile to reduce your use of BNPL services and instead use a direct debit or credit card.
Applying for a mortgage can be a stressful time. There are various factors that contribute towards becoming a homeowner, and the mortgage application is just the beginning step. Finding your perfect home is a process, so if you’re wondering “how can I sell my house fast” or have any other enquiries regarding buying or selling a property, check out the We Buy Any House site for more information.