Getting a mortgage with a debt management plan may be difficult, but it is still possible. This is why you need the advice and support of a specialist advisor to navigate your application process and give you the best possible chance of a favourable mortgage.
What is a Debt Management Plan (DMP)?
A debt management plan refers to the informal agreement between debtor and creditor for paying off your debts. They’re typically managed by a third party DMP provider who will handle communications with creditors on your behalf.
DMPs are not legally bound, which means that you have the right to cancel it at any time, though creditors may be likely to take court action in this circumstance.
How a Debt Management Plan affects your chances of getting a mortgage
A debt management plan will make it more difficult for you to get a mortgage because it will affect your credit score negatively and it indicates prior financial struggles.
When you apply for a mortgage, lenders are effectively assessing the level of risk associated with loaning you money, and asking for repayments. Any previous financial struggles, such as those leading to a DMP, may be a red flag to a potential lender, who may question whether you can be trusted to keep up with mortgage repayments.
Some creditors may even register a default on your record, even with a DMP, because you are still paying a lower amount than initially agreed upon. Defaults also affect mortgage applications.
Typically, lenders will assess:
- The status of your DMP, regarding whether or not it has been satisfied;
- How long it has been in place;
- Your payment history within the plan.
Debt Management Plans and your credit rating
Debt management plans negatively impact your credit rating because they show that you are paying less than originally agreed. Not only does this show credit agencies that you may be untrustworthy regarding regular payments, but it can also lead to accounts being marked with ‘arrangements to pay’, or even defaulting.
However, making regular DMP payments does indicate a level of financial responsibility, more favourable than simply having unpaid debts. On top of this, itis possible to get ‘bad credit mortgages’.
How long does a Debt Management Plan affect your credit score for?
The individual debts on a debt management plan may affect your credit score for 6 years from the original date of entry.
This period can be even longer for debts marked ‘arrangement to pay’ than defaults, because the time starts from when the debt is settled, not when the DMP is agreed.
Can you get a mortgage with a Debt Management Plan?
Yes, you can get a mortgage with a debt management plan. However, it is likely to be more difficult and you may experience higher interest rates and/or need a larger deposit.
The best way to maximise your chances of getting a mortgage with better interest rates and without necessarily needing a huge deposit is to work with a specialist financial adviser or insurance broker, such as Barlow Irvin.
Our expertise allows insight into optimising your applications, and understanding how best to present your financial situation to lenders. We’ll also be able to advise as to which lenders are best suited to your case and well known for working with individuals with DMPs.
Can you remortgage if you have a DMP?
You can remortgage with a DMP, but it may be challenging. The lender will assess your remortgaging application based on your current financial situation, looking at factors such as your income, and how you have managed your DMP.
Before applying for a remortgage, you should focus on improving your credit score as much as possible, and remain in consistent employment to demonstrate your financial stability.
How to improve your chances of getting a mortgage after a Debt Management Plan
If you have, or have previously had, a debt management plan, you can still achieve a favourable mortgage deal. The best way to do this is by working on your credit score and showcasing recent financial stability.
The easiest way to do this and optimise your application is by working with a team of expert financial advisors, on hand to support and communicate with you every step of the way. On top of this, we’ll provide the insight you need to understand which lenders are most likely to accept your application, ensuring we find the right mortgage for you.
Get in touch today to get started.