Can I get a Mortgage on a Debt Management Plan (DMP)?

Deciding to take on a mortgage is one of the biggest financial decisions most of us will make in a lifetime, so it is vital to know how the process could be effected by debt.

What is a Debt Management Plan (DMP)?

Debt Management Plans (DMPs) are an informal solution to debt, which means they are not legally binding.

With a Debt Management Plan, either you or a third party can negotiate an affordable payment plan which will see you make reduced payments towards your outstanding debts.

You are not legally prevented from applying for credit, but taking on other financial commitments is usually a bad idea. This is because many DMP providers – particularly charities – expect you to commit to not taking on any further credit for the duration of your DMP.

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Can I get a mortgage with a Debt Management Plan?

Your chances of being accepted for a mortgage, and the kind of mortgage deals you qualify for, depends on your credit rating. If you go to mainstream lenders with an exemplary credit score, you shouldn’t have a problem.

If you have a Debt Management Plan, on the other hand, getting a mortgage is trickier. You’re already making a required monthly payment to your DMP, which is a strain on your disposable income, and mortgage brokers know this.

That doesn’t mean it’s impossible to get a mortgage with a DMP.

Debt Management Plan mortgages during your arrangement

Your current creditors are likely to look unfavourably on you if you apply for new credit agreements like mortgages during your Debt Management Plan, since this implies than you can afford to make debt repayments in full, despite offering them only reduced payments.

If you already have a mortgage when you enter into a DMP, it should not be affected. This is because DMPs primarily deal with unsecured debt, whereas a mortgage is a secured against your property. This means that should you default on your payments, your property could eventually be repossessed, allowing your mortgage provider to recover what you owe them.

When working with a DMP advisor to develop a budget, and working out how much you could afford to put towards your unsecured debts each month, any mortgage payments you make should be taken into account.

Getting a DMP mortgage once your arrangement ends

Once you have finished your DMP, you are once again free to apply for credit with no repercussions. However, years of making reduced payments towards your debts will have had a negative impact on your credit score, so most mortgage providers will be unwilling to offer you a mortgage.

You may be able to find a provider by consulting a mortgage broker, but you will most likely be faced with a large deposit, and a high-interest rate, not to mention the broker’s fees.

Can I get a mortgage with specialist lenders?

There are certain specialist lenders who work specifically with customers who have a poor credit rating, or have recently been discharged from a debt solution like a Debt Management Plan or an Individual Voluntary Arrangement.

These specialist brokers attract customers with their attitude to credit. To a specialist lender, a poor credit score is no barrier to a new mortgage, whereas high street lenders tend not to accept mortgage applications from someone who has had adverse credit issues in the past.

The problem with bad credit mortgages is that they come at a cost. If you have bad credit, mortgage rates you qualify for are likely to be high, and can leave you struggling financially. For this reason, it’s usually best to avoid specialist mortgage lenders, take some time, and rebuild your credit score before you apply for a mortgage.

How do I improve my credit history before making a mortgage application?

If you have a poor credit history and have recently been discharged from a Debt Management Plan, your will have to boost your credit rating before approaching mortgage brokers if you want to avoid high interest rates and monthly payments.

This can be done in a number of ways:

Check your Credit Report

A copy of your credit report can be had from Equifax, Experian, or Callcredit for around £2. Request a copy as soon as you have finished your DMP, and make sure that all your details are correct – the file should show that all the accounts associated with your DMP are closed.

You should also ensure that other details, such as your address, are correct since even small discrepancies can have a negative impact on your overall score.

Register for the Electoral Roll

Being registered on the electoral register lets credit reference agencies know that you have a stable permanent address, which will boost your credit score.

Allow time for poor credit scores to improve

Time can be a big help when it comes to your credit score. Your credit file covers six years of history, meaning that your last DMP payment will drop off the record six years after it has been made. Once the DMP is no longer on your file, your score will begin to creep back up.

Take out new credit – But avoid late payments

Experiencing problem debt can be enough to put anyone off applying for credit ever again, but using credit carefully is the best way to prove you can handle debt responsibly and rebuild your credit score in the process.

At first, you will only be able to access high-interest credit, but after proving yourself able to keep on top of this, your score will start to improve and open up better deals.

Do not Apply for too much Credit too soon

If you apply for credit and get rejected, it can be tempting to try somewhere else straight away, but this can actually sabotage your efforts to improve your credit score.

This is because applying to multiple lenders in a short space of time can make you appear desperate for money. Instead, try using an eligibility checker before applying.

Where can I get financial advice or more information on DMP mortgages?

If you’re researching debt solutions and you’re wondering whether you will be able to get a mortgage with a DMP, you should seek professional advice.