New Credit Scoring Changes Could Prevent Millions From Buying Homes
New changes to what is being reported on credit reports could hit many potential home buyers hard, and keep them out of the market.
Along with rising interest rates, new hits to credit scores could take more home buyers out of the market. This may be welcome news to some investors who have been craving less competition.
While credit scores may not be needed to obtain transactional funding to wholesale properties, investors should also be watching out for the impacts on end buyers, and who may end up not qualifying or being able to close.
Buy Now, Pay Later
One of the latest moves by the big credit bureaus has been to include buy now, pay later loans on credit reports. This includes TransUnion and Equifax.
According to TransUnion, this is being done in the name of “inclusion.” It is estimated around 100 million Americans use this type of financing each year. It’s already a $91B market, growing at over 45% per year. It is expected to become a $4T market by 2030 according to Allied Market Research.
You’ve seen these ads online. Now when you go to check out you may see payment plans being offered by Buy Now, Pay Later companies like Affirm, Zezzle, Klarna and After Pay.
It seems convenient, but this could also create major problems.
For a start, borrowers using these loans for items as cheap as $50 can’t really afford them. It is also multiplying inflation. Now fashion companies can quadruple their prices, because consumers can pay over time. So, instead of a pair of yoga pants being $25, they may sell for $100. Then there are many hidden costs or interest involved in some of these types of credit.
This is during a time when there are already tens of billions of dollars in spiking business and credit card defaults and late payments.
The lenders want this credit on reports to motivate people to pay on time. Or perhaps because they are not paying on time. Including them on credit reports may only exclude millions of borrowers from homeownership.
This also comes in the wake of some lenders counting recent COVID forbearance programs the same as foreclosure. A move that takes even more out of the buyer pool. Even if their mortgage company put them into forbearance without their permission.
Summary
Be wary of convenient looking buy now, pay later deals. They are not designed for the benefit of consumers. Now they might exclude millions from being able to buy homes.
On one hand this may free up more inventory and lower competition for investors. It also means that while it won’t affect you obtaining 100% transactional funding for wholesale deals, it may mean many end buyers won’t qualify to buy your deals with financing.
