Can I get a mortgage when I’m in a debt relief order?
Buying your first home is a big milestone in many people’s lives – but when you’re dealing with debt and worrying about money, it can often seem like it’s slipping away.
However, just because this is your situation right now, doesn’t mean your current mortgage is doomed or you have no chance of obtaining one in the future.
There are many debt solutions out there that are suitable for all mortgage situations, but we thought we’d create this guide to explain to you if it’s possible to get one with a Debt Relief Order (DRO) and what to do if you’re already a homeowner.
It seems proper to firstly explain what a DRO is and how it works. This type of solution is designed for those who are unable to repay their debts by freezing them for 12 months, allowing you time to try and turn your situation around. If you are still not able to pay after this period has ended, then the debts will be written off.
One of the most important things to remember when entering into a Debt Relief Order is the adverse financial effect it will have on your life.
In order to be approved, you have to prove that you definitely aren’t able to pay your debts and that you will be better off once you have completed the DRO. The main reason for this is because your debt can be written off entirely if you successfully complete the arrangement.
Getting a mortgage with a DRO
The answer to this is pretty simple – you cannot have a mortgage when getting a DRO and it will be pretty much impossible to take one out whilst you are in one.
This is because as part of the criteria to qualify for a DRO is that you aren’t able to own any large assets or have any equity available that could settle your debts for you. They are also designed for people who have an overall debt level of £20,000 and have £50 or less left over after they have paid all their bills.
But do not fear, as you will be able to apply for a mortgage once you have completed the DRO, which only lasts for a year. However, you may find it hard to get accepted as your credit score will have been affected by your previous money problems and the fact that the DRO will show on your report for six years.
As such, we advise that the best course of action is to take some time to rebuild your credit score before attempting to take out a mortgage. Doing this will increase your chances of being accepted and will likely help you find better interest rates and more affordable deposit amounts.
What if I already have a mortgage?
If you are already a homeowner, you cannot apply for a DRO, even if the property is in negative equity. This is because the companies you are in debt to will expect you to try and re-mortgage or downscale your house to try and pay back your debts.
It also means that you could potentially pay back your debts through a different debt solution at one point in the future.
As such, if you are struggling with debts and do not qualify for a DRO, there are other debt solutions that you could enter to help you deal with your debts without having to affect your mortgage.
Individual Voluntary Arrangement (IVA)
An IVA is a legally binding agreement between you and the companies you owe money to that allows you to make a single affordable monthly payment for a period of five to six years.
Interest and charges are frozen on your debts for the duration of the IVA and the companies included will not be able to contact you. Once you have completed your payment plan, the remainder of your debts will be written off.
In terms of your property and your mortgage, you will never be asked to sell your home in an IVA, although you may be asked to attempt to release equity from it if any is available.
You can find out more about this option here.
Debt Management Plan (DMP)
This option is an informal one that you can arrange with your creditors that, unlike an IVA, won’t be put on a public register – which can be a good option for those who are worried about their credit score being affected.
You can arrange this type of solution yourself without the help of debt advisers or you can arrange it through a DMP company. Either you or an adviser will need to calculate an affordable monthly payment that will then be offered to those you are in debt to. You will need to provide evidence to prove that this is as much as you can afford.
A DMP is not legally binding, so your creditors are not obligated to agree to the arrangement when it is offered. This also means that they aren’t required to freeze interest and charges and can choose to revoke the DMP at any time.
Trust Deeds are the Scottish version of an IVA and works pretty much the same. You will again pay just one affordable monthly payment and, as long as you successfully complete the arrangement, any remaining debt will be written off.
The main difference is that this type of arrangement will only last four to five years instead of six, but you are still protected from any action from your creditors and any interest/charges are frozen.