Yes! We have helped hundreds of people obtain mortgages with DMP’s . We understand what the lenders want to know and will showcase your application so that they understand the positive steps you have taken to manage your current debt.
If you have a Debt Management Plan in place, it’s still very possible to get a mortgage offer.
The information below will help you understand how a DMP affects your mortgage application and how your financial situation with a Debt Management Plan in place looks to a lender.
Each person’s financial circumstances are different, and we will ensure the potential lender understands what life event occurred that has led to your income no longer being able to fund your financial commitments. This could be things like a relationship breakdown, redundancy, or an inability to work due to ill health.
As specialist bad credit mortgage advisors, we can help you find a lender that fits your circumstances as we work with many lenders who will accept a client who is in a Debt Management Plan.
When you enter into a Debt Management Plan you’ll come to a repayment agreement with your creditors and arrange to pay a single monthly payment that’s based on what you can afford after all your priority outgoings have been covered. It’s an informal arrangement and you can leave it at any time.
Priority payments include things like rent, mortgage, utility bills and council tax. These come first and won’t be subject to a Debt Management Plan if you do take out a plan.
Many DMPs are set up through specialist organisations, some of whom charge for their work. They will look to freeze the interest payments on the commitments, look at creating payments you can afford and distribute those payments in a way that’s fair to the creditors.
But certain factors of a DMP can potentially impact your credit history, which does have an effect when you’re applying for a mortgage:
As with any other financial agreement, you should always check the terms of a DMP to make sure you understand all outcomes and consequences.
If you’re applying for a mortgage whilst in a DMP lenders will take the monthly plan payments and treat them as a financial commitment, for affordability purposes.
But when a DMP registers defaults on your credit file, this affects how ‘risky’ you appear to lenders. What’s more, if a lender doesn’t properly register the commitment within the DMP your account might show that you’re still in arrears, rather than it being defaulted which causes a bigger problem.
This would be a problem as it not only affects how you appear to lenders, but it also delays the time in which you can apply for a DMP mortgage too.
Example:
You have entered into a DMP within the past 12 months and there are 10 creditors within the plan. You could potentially have 10 defaults being recorded against you.
It would not be possible to get a mortgage at this time.
But once the DMP has been running for 12 months and the most recent default is also 12 months old, you could begin to apply for a mortgage. Lenders would want at least a 25% deposit.
Once the most recent default is 2 years old, your deposit requirement would likely reduce, and lenders would consider your application with a 10% deposit.
Once you’ve started a Debt Management Plan, it’s important to keep an eye on your files and check that the arrangement is registered on your credit file as quickly as possible, to give you the quickest route to any sort of mortgage whilst inside a DMP.
If you’re already paying a mortgage and you enter into a Debt Management Plan, there will be no impact unless you’re looking to raise money from your property or move house.
As with any mortgage application, a lender will look at your unique circumstances and make a decision based on those.
Having completed the terms of a Debt Management Plan program and without having to make monthly repayments any longer, a settled arrangement means you should appear more favourably to lenders.
However, some lenders may want to wait 12 months after you’ve settled your DMP to accept your application, whereas others may be more willing to lend sooner. The longer it’s been since you had a DMP, in general terms, the better options you’ll have.
If you have questions about getting a mortgage with an adverse credit score, read our FAQs. Our wealth of knowledge within this market means that we’re confident in our ability to offer specialist mortgage advice and secure the mortgage you want regardless of your credit history.
A Debt Management Plan (DMP) is a process designed to help those that are struggling to manage their unsecured debts such as credit cards, personal loans, and other types of unsecured credit commitments.
A DMP is generally administered by a credit counselling agency such as Step Change or Pay Plan. They will work with you to create a budget, which will be used to calculate the amount of money you are able to afford to pay towards those debts each month.
Once the budget has been created, the credit counselling agency will contact your creditors to negotiate lower interest rates (or maybe even have them frozen), reduced fees and a more affordable repayment plan that is easier for you to maintain until the debts have been fully repaid. Once the DMP has been created you will then only be expected to make a single payment to the credit counselling agency, which will then distribute the funds to the creditors according to the new agreed terms.
The main goal of the DMP is you help you repay all of your debts in an affordable and reasonable amount of time, while minimising the financial burden of interest and fees. DMP’s are not the right solution for everyone struggling with debt, and the effectiveness of the DMP will largely depend on your financial situation and the ability to stick with the new repayment plan.
100% yes, it’s possible. We help lots of people get a mortgage whilst they are in Debt Management Plans. Although as expected, it can be more challenging than if you didn’t have one.
The banks or lenders that will consider your mortgage application whilst you are in an active DMP will likely charge you a higher interest rate and demand a higher percentage deposit to reduce their risk.
Having a DMP means that you are currently in a plan to manage your debts. This will almost certainly have an impact on your credit score as well as affect your debt-to-income ratio and affordability as the ongoing monthly payment for the DMP will also be factored in for affordability. These are the three main factors that a lender will consider when underwriting your mortgage application.
Although your credit score has been effected due to being within a DMP as it is a sign that you were/are having financial difficulties. If the payments have been maintained and the DMP conducted satisfactory, this can also demonstrate your financial responsibility and show that you had taken steps to take back control of your finances, which could work in your favour.
Your debt-to-income ratio (DTIR) could also be affected by the DMP, as lenders will consider the amount of debt that you have vs your household income when underwriting your application. Entering into a debt management plan can significantly reduce your monthly outgoings as you will be making smaller payments through the plan than you were before, however this also means that the length of time it takes to repay your debts will also be increased. This could impact your ability to apply for new credit.
Lenders will need to understand what happened in your life that a DMP is required to gain back control of your finance, usually these can be pinned to a life event such as relationship breakdown or loss of employment.
Due to the importance of a back story, when our clients are in a DMP we help them to pull this together for their mortgage application so that the underwriter understands what happened and the steps taken to get your finances back on track. The stronger the steps taken and changes to your circumstances will help the underwriter understand that the risk has been reduced and that your application should be accepted.
When entering a DMP you can expect to see negative effects on your credit score. The main reason behind this is that although the DMP is helping you take the steps to regain control of your finances, the agreed terms for the original commitment were not being kept and as a result the creditor will likely report back to the credit agencies that the payment has been missed. This action means that once the commitment has fallen more than 6 months in arrears the creditor can still default the account even though an agreement has been made for reduced payments.
It is important to understand that the missed payments and defaults are the main cause that your credit score has reduced, not the actual DMP itself as most creditors fail to report your accounts as being in a DMP.
How much your score will be affected will also depend on how many creditors are included within the DMP. The more accounts included will mean the greater the score reduction.
Overall whilst entering into a DMP will have an initial negative impact on your credit score, the long-term benefits of repaying your debts and improving your financial situation will likely outweigh any temporary credit score decrease.
Entering into a DMP will reduce the number of lenders which you can apply to as there are many which will not consider applications for people currently in an active DMP. However, it most certainly isn’t a deal breaker in terms of a mortgage no longer being available as there are many lenders that will still consider your application.
A few important things to understand before starting to make mortgage enquiries whilst currently in an active DMP are as follows:
How long has the DMP been running: most lenders would want you to have been in a DMP for a minimum period of 12 months and made all of the agreed payments to demonstrate that the plan is working to improve your financial situation. There are however a couple of lenders that have a no minimum time period and applications are assessed on a case-by-case basis on how the accounts are being recorded to the credit reference agencies.
As you would expect the longer your DMP has been running then the easier applying for a mortgage will become. You will have more lenders available to you once the DMP has been running for 3 years providing that all payments have been made on time and no other adverse credit has been recorded against you for any other credit agreements outside the plan, this includes mobile phone contracts and household bills.
How many creditors are included withing the DMP?: This is extremely important when the DMP has been running for less than 3 years. The main reason for this is that the original creditors included are likely to record missed payments and defaults against you for not making the original agreed monthly payments when you purchased their services or bought their goods.
All lenders appetite for risk is different and they will all have a different tolerance to how many defaults they will accept recorded against you within the past 3 years.
Type of commitments included within the DMP?: The type of commitments included within a DMP can also reduce the lenders available to consider your application. For example, if unsecured loans (personal loans) and hire purchase agreements such as car finance are included, this can make things more difficult because of the FCA’s classification of which type of commitments are classified as credit impaired and the permissions which a lender must hold to lend.
How much deposit are you likely to need: Applying for a mortgage whilst currently in an active DMP or if you have just completed one will likely mean that you will need a larger deposit to support your mortgage application. Exactly how much deposit required will be dependent on the above points, but as a guide you should expect to need anywhere from 10% to 30% deposit.
This will mainly depend on the reports provided by the creditors included within the plan. Typically, all signs of the DMP are usually no longer visible 6 years after the last credit account included within the plan has defaulted.
It is not uncommon for people to still be in a DMP for years after they are no longer visible on their credit file. It is however important to still notify the lender as the payments can still be visible on your bank statements, failure to declare adverse is one of the main reasons you can expect to have your mortgage application declined.
