Can a Debt Management Plan Affect Your Mortgage Chances?

Can a Debt Management Plan Affect Your Mortgage Chances?

If you have a history of debt and want to take back control of your finances, you may have come across a debt management plan. This type of plan is designed to help you get on top of your finances, paying creditors back in affordable monthly payments.

But if you have a debt management plan in place, or you’ve previously used one to pay off your debts, you might be wondering can you get a mortgage while on a DMP?

It’s still possible to get a debt management plan mortgage whether it has been settled or not but, as with any mortgage application, your individual circumstances will still play a large role in this.

This blog will look into how a DMP can affect your chances of getting a mortgage and what to do if you find yourself in this situation.

What is a Debt Management Plan?

A debt management plan is a debt solution agreement between a creditor and a debtor to pay off non-priority debts. You will arrange an affordable monthly repayment plan with your creditors, but there are no legal commitments meaning you can leave the plan at any time.

This type of plan only includes less severe debts like bank loans, credit card debt, student loans and benefit overpayments.

You may need to go through a specialist organisation to set up a DMP, but it’s key to note that some may charge for this service. In some cases, they can freeze your interest to create affordable payments that your creditors are also happy with.

As long as you can afford your priority debts (such as rent, gas and electricity etc) a DMP can be very beneficial in helping get back on track with credit card payments and loans.

Can You Get a Mortgage While on a DMP?

Being in a debt management plan itself won’t prevent you from getting a mortgage, but certain consequences of a DMP is what could affect your application.

When you apply for a debt management plan mortgage, lenders will consider these monthly payments as a financial commitment to assess whether you can still afford mortgage repayments.

However, if defaults are registered on your credit profile you will be considered as higher ‘risk’. Your account can also still show that you’re in arrears instead of a DMP if it hasn’t been registered properly.

Once again, this is something that would suggest to lenders that you’re financially unstable.

This will also impact when you can apply for a DMP mortgage since many lenders will want to see that the DMP has been running for 12 months, with no further defaults in the same 12 months.

How Does a DMP Affect My Credit History?

When applying for a debt management plan mortgage, your credit history plays a large part in your application. Lenders will look at it to assess your ‘creditworthiness’ and decide whether they believe you can afford monthly repayments.

Being in a DMP can affect your credit history is a number of ways, in turn affecting your chances of getting a mortgage, such as:

  • You will be expected to stick to your monthly DMP payments. If you miss any within the last 12 months of applying for a mortgage it’s very likely that your application will be declined.
  • Your debt can still be registered as a default by your creditors since you failed to stick to the original payment terms. This will be visible on your credit file when you apply for a mortgage.
  • You may still be chased for the debt and charged interest by a creditor since a DMP is just an informal agreement. This won’t always be the case, but it’s something to keep in mind when signing up to one.
  • Depending on what you can afford, it may take a long time to pay off your debts. This can result in paying more in total if you’re also being charged interest.

Before signing up to a DMP, always check the agreement to make sure you’re aware of any potential consequences.

What if I’ve Settled my DMP?

If you’ve settled your DMP and no longer need to make monthly payments, your application should look much more favourably than it would if your DMP was still active.

However, just like any other mortgage application, a lot of other factors come into the decision to reject or accept you such as your other financial circumstances.

Some lenders may want to wait 12 months after you’ve settled your DMP to accept your application, whereas others may be more lenient. In general terms, the longer it’s been since you had a debt management plan, the better options we will be able to find for you.

If you’re considering getting a mortgage with a DMP, speak to one of our specialist bad mortgage brokers at Adverse Mortgage Advisors we’d be happy to discuss your options to see if you’re eligible.

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