Can I get a mortgage with a DMP?
If you are currently on a debt management plan (DMP), or have completed a debt management plan in the past few years, it will, of course, affect your ability to get a mortgage. However, it does not necessarily mean that you will not be able to obtain finance to buy a new home or be able to remortgage your existing property.
There are many lenders in the market who specialise in providing mortgages designed for people who have had credit problems, so even if you have been turned away by high street banks and building societies, do not give up; it may still be possible to get a mortgage from a more specialist lender.
Mortgages with a DMP
What is a Debt Management Plan (DMP)?
A debt management plan is an informal repayment arrangement between you and anyone you owe money to for what are classed as non-priority debts. Non-priority debts are things like store and/or credit cards, loans, and other credit agreements, such as a mobile phone contract. To be able to take out a DMP, you need to be able to afford your rent or mortgage, council tax, utility bills and other living costs, plus a contribution to your non-priority debts.
DMPs are usually arranged and managed by a DMP practitioner. The practitioner will act as a buffer between you and your creditors – they will negotiate with them on your behalf, and you will make regular monthly payments direct to them. The DMP practitioner will then pay your creditors the agreed monthly sum. A DMP practitioner may take a fee or may be free for you to use. Fee charging DMP practitioners usually charge an initial arrangement fee plus a handling charge for each monthly payment they process. The three main free DMPs are StepChange, Payplan and National Debtline.
One thing to bear in mind is that unlike with an Individual Voluntary Arrangement (IVA), the interest on the debt is not automatically frozen. Because of this, and because you will be paying back less under the DMP than you would be without one, it can take a long time to clear debts.
Because DMPs are not legally binding, you can cancel an arrangement at any time. There is also no legal obligation for you to avoid taking out more credit.
If you are currently on a debt management plan, it may be more difficult for you to successfully apply for a mortgage than if you have completed your DMP. However, lenders who specialise in lending to those with past credit problems are often more willing to look at your overall financial circumstances and assess your application on an individual basis, rather than automatically declining the mortgage outright.
Mortgage if I have a DMP
When assessing a DMP mortgage application, in addition to the usual criteria – such as evaluating your income and expenditure (including your monthly DMP payment) to calculate affordability – the lender will also take account of the severity of any other credit problems, and how long ago they occurred.
If, for example, alongside a current DMP, you have had more serious problems with credit in the past – such as bankruptcy or an Individual Voluntary Arrangement (IVA), or you have had a property repossessed – you may find it more difficult to be accepted for a mortgage. Less serious issues, such as late payments, or limited arrears that have since been cleared, may not present so much of a problem to the right lenders. As a general rule, the older the entry on your credit file, the less negative weight it will carry when a lender is making a decision.
High street lenders make decisions as to whether to lend based on a credit score. The information used to determine your credit score is gathered by the credit reference agencies. The three main ones being, Callcredit, Equifax and Experian. Just to be clear, the credit reference agencies only provide the information, it is the lender that decides how to interpret it; it is always the lender’s decision as to whether they agree the credit.
In order to qualify for the better mortgage deals on offer, you need an exemplary credit score and, often, a sizable deposit. If you are dealing with bad credit, the chances are you will have neither of those things. Every month you make a payment under your DMP, it can show up as an underpayment on your credit report. This is because although you have come to an agreement with your creditors under the DMP, they may still record the reduced payments you make as defaults, as you are unable to pay the amount you initially agreed to pay – you broke the terms of the initial credit agreement you had with them. Also, if you had a substantial sum of money to use as a deposit, the chances are you would have used that to pay off (or pay down) your debt.
All that combines to mean the number of lenders and mortgage deals available to you are limited by your DMP– but it is not necessarily impossible to get a mortgage.
Many of the points mentioned above will also apply if you have completed a debt management plan – and if you have had a DMP at any time in the past six years you may find it difficult to get a mortgage with a mainstream high-street lender, as that is how long details stay on your credit file – but in general you are likely to find lenders more willing to give you a mortgage if you have seen a debt management plan through to completion than if you are currently on one. Obviously, this will be considered alongside an assessment of affordability and any other adverse items showing on your credit records.
Getting a mortgage with settled DMP
If you are looking for a mortgage having settled a DMP, the first thing do is to get a copy of your credit report. Check first that the basics are correct – contact details and electoral roll registration. Incidentally, if you are not on the electoral roll, register as soon as possible, and make sure it shows in your credit report. Not being on the electoral roll, or being on, but it not showing on your credit report, can adversely impact your credit score.
Next, check the actual credit details. Are there any defaults showing for debts that are now settled? If so, write to the companies involved and ask if they will update the status of the debt from default to satisfied. They are not obliged to do that, but if they are prepared to, then those defaults will be noted as such on the report.
Are there any incorrectly recorded adverse details? If so, again, write to the companies involved and ask for those entries to be removed. (Copy the letter to the credit reference agency as well.)
Take steps to rebuild your credit history. Borrow a small amount and pay it back as agreed – or take out a credit card with a small credit limit, use it every month (perhaps for groceries or petrol) and pay it off in full each time. A good tip is to set up a direct debit to ensure the minimum payment is always made on time and thus not show as a late or missed payment on your credit file should you forget to pay by the due date.
How do I get a mortgage with a DMP?
There are lenders that will consider a mortgage application if you are conducting your DMP satisfactorily. However, this is still dependant on many other contributing factors. It is advisable to speak to a specialist broker who understands DMPs and understands the lenders that operate in this sector.
Here at Just Mortgage Brokers we have experience in this field and can help find the mortgage that is right for you.
As you can see, the processes you may need to undertake if looking to obtain a mortgage with a current or spent DMP can be quite complex. You may also find that, as a private individual with a blemished financial history, most of the traditional high street lenders will shy away from lending to you, as many of them perceive someone who has entered into a Debt Management Plan in the past (whether it is still remaining on your credit history or not) as being too high a lending risk.
This means you may need to obtain a mortgage from one of the many specialist mortgage lenders in the UK market – several of whom have been willing to lend to people with a DMP to their name once all their financial circumstances are taken into consideration. The trouble is that these specialist lenders do not operate on the high street, do not advertise their services publicly and will only accept mortgage applications made through a trusted intermediary, such as a professional broker like ourselves at Just Mortgage Brokers.
As a mortgage broker who specialises in poor credit mortgages and helping borrowers with a DMP and other forms of adverse credit, we have access to mortgage lenders across the full spectrum of the UK market, including those specialist lenders you will not be able to contact yourself. Our huge amount of experience in this field and an in-depth understanding of the poor credit mortgages market means we have the knowledge, insights and technology to quickly identify exactly which lender will be able to meet your needs and the best way to approach the application.
Our outstanding relationships with lenders across the board means we are also often able to get you a better deal and save you money over the lifetime of the loan. Even an improvement of 0.1% on the interest rate can translate to a saving of hundreds of pounds a year that you would otherwise have to pay to the lender. Interested in finding out more about your options for a mortgage with a DMP? Get in touch today for free, no-obligation initial help and advice.
– How long does a DMP need to be set up for to enable me to get a mortgage?
This very much depends on the individual lender but at the time of writing, this is currently 12 months. However long it’s been set up, if a DMP is still active then you are likely to be asked to put down a bigger deposit and to pay a higher rate of interest on the loan.
Arguably the biggest issue you face is affordability; if you are paying a DMP on top of other household bills and financial commitments, then you have less per month to pay a mortgage with.
Supposing you have managed to save a good deposit, then you are faced with a choice; do you use all or some of that money to clear your DMP, then start saving again? Or do you try to get a mortgage with an active DMP?
Our team of specialist brokers can offer free, no obligation help and advice, so if you want a mortgage but are in – or have been in – a DMP, get in touch.
– Do all my payments to the plan need to be made on time and in full?
Yes, ideally they do, to avoid doing more damage to your credit rating.
However, if you find you are struggling to pay important household bills because of having to pay your DMP, get in touch with your DMP practitioner. One of the jobs of a DMP practitioner is to make sure you can afford to live, as well as clearing your debt. It may be necessary to renegotiate your payments to creditors in order to give you sufficient money for other bills.
You should also remember that a DMP is not legally binding and you can cancel one at any time.
– Does the DMP need to be satisfied before applying for a mortgage?
No, it is possible to get a mortgage with a DMP – although it will be more difficult and you will have fewer options available. You should also expect to have to put down a bigger deposit and to pay a higher rate of interest on the loan.
There are lenders who specialise in lending to people with past credit problems, and they can be more open to looking at someone’s overall financial situation. Rather than working on a score, or seeing a DMP as a red flag that means you are automatically declined, they assess each case on its own merits.
Our specialist brokers can help you to find the lender offering the best deal for you.
– Can I pay my DMP off early?
Yes. If you are able to pay more each month than was initially agreed, or if you should come into some money that allows you to pay it off in one go, then that’s to your advantage.
If you have been in your plan for six months or more and you make an offer to a creditor, they may be willing to accept, say, 50% of the debt as a lump sum. You can do this with all your creditors or with just one – or one at a time – depending on how much you are able to pay.
– Do you take the payments made to my DMP as a deduction monthly?
DMPs are generally arranged and managed by a DMP practitioner. They assess your financial situation and also carry out negotiations between you and your creditors. Once an agreement has been reached, you make the required monthly payment direct to the DMP practitioner. The practitioner then deducts any fee they charge (some charge, some don’t), and uses the balance to make the agreed payments to your creditors. This means you make just one payment each month, no matter how many creditors are being paid out of it. This monthly commitment is then taken into consideration for your affordability in regard to your mortgage in the same way as any other loan payment would be.
– How long does a DMP stay on your credit file?
An actual debt management plan will not show on your credit report, but creditors that are paid through the DMP may indicate this is the case on your report, or that payments are in arrears, and this will remain showing for six years from when the accounts are settled. It does also have to be disclosed as part of a mortgage application regardless of any records on your credit file.
– How long does a debt management plan last?
How long a debt management plan lasts will depend on your individual circumstances, such as the balance of debts within your DMP and your income and expenditure that will determine the amount you are required to pay each month.