Are you someone looking to get a mortgage after a debt management plan?
As uncommon as this scenario may sound, thousands of people in the UK have the same questions you do.
How does a debt management plan affect my chances of getting a home loan? Does a debt management plan affect my credit score? Will my mortgage application be rejected because of my debt management plan?
I’ve brought you a comprehensive guide to address all these issues and more.
Let’s get right into it.
What is a Debt Management Plan?
A debt management plan is an informal debt management procedure that allows you to pay your debt back in the form of monthly payments over a specified period of time.
A debt management is not a legally binding procedure. That means that it does not stop your creditors and debt collectors from contacting you and chasing you around for payment.
A debt management plan is usually applicable on most types of unsecured debts, such as personal loans and credit card debt. It does not cater to debts that are secured against some asset of yours.
One of the most important pieces of information you should know is that a DMP can significantly impact your credit score, both for the better and the worse.
How you get a DMP is a fairly uncomplicated process. I’ve got all the information you need to get started.
Firstly, you need to get in contact with a DMP provider to get started with your DMP. You need to be sure that you’re contacting an organisation that is authorised and regulated by the financial conduct authority (FCA).
Your DMP provider may ask you to provide certain information related to your debts, information on who you owe debt to, information on your income, and information on the assets you own.
Once these details are sorted out, your provider will set up a monthly payment plan for you and will contact your creditor on your behalf and convince them to agree to the terms of the DMP.
Is it Possible to Get a Mortgage After a Debt Management Plan?
This section addresses if it is possible to get a mortgage after a DMP is listed on your credit report.
You’ll be pleased to know that there’s no official or legal blockade to getting a home loan with a DMP.
However, most lenders and creditors will be very reluctant to give a mortgage loan to someone who has a DMP listed on their credit file.
A DMP caters to a lot of loan types, and it’s very possible that your loans count as bad credit; such as personal loans or credit card debt. If you do have bad credit, it could significantly impact your chances of getting a mortgage loan.
So why does a DMP impact your chances of getting a mortgage? The answer is simple. Creditors see an excess of bad credit as risky financial behaviour. If you have a DMP listed on your credit report, lenders see you as financially unstable.
It signals to mortgage lenders that you’re someone who has faced a lot of trouble dealing with your debts in the past, to the extent that you’ve had to get a DMP to properly manage your debt.
One of the most important things you should know about mortgage lenders is that they need to evaluate risk and reward at a much larger scale than other lenders.
Mortgage loans are some of the biggest loans out there, and most mortgage lenders want to know if they’ll get a return on the massive investment they’re putting in.
When they see someone who is struggling with a DMP when it comes to smaller loans, they would certainly hesitate to lend their money to them.
Also, a DMP can affect your credit history, which is one of the most important things creditors consider when they’re deciding whether to loan you or not.
All in all, while it is possible to get a mortgage loan after a DMP, you’ll have to find the right creditor, one willing to offer you reasonable terms on your mortgage loan.
How to Get a Mortgage After a DMP – The Complete Breakdown
This section addresses everything you need to know about getting a mortgage after a DMP.
Let’s get right into it.
- Check your credit history
The first thing you should do to get a mortgage after a DMP is to contact one of the three main credit report providers and check your credit file.
Since this is the first thing most creditors will be looking at, you need to make sure everything is in order.
This means checking for any defaults that should not be there, or incorrect information that could harm your chances of getting a loan and needs to be updated.
- Don’t spend more than you can afford to pay back
It’s best to avoid spending a huge amount on getting a house.
You may be tempted to spend a lot, but remember, you have a DMP listed on your credit file and the bigger the mortgage you apply for, the lower the chance is of it being accepted.
On the flip side, if you spend a smaller percentage of your budget on a house, you can probably pay a larger deposit upfront and you’ll have to pay back a much smaller mortgage loan.
- Get help from a financial advisor
Applying for a mortgage loan can be a very complex and emotionally heavy process.
I recommend that you definitely seek debt help from an experienced financial advisor to guide you through your situation.
Alternatively, you could consult a mortgage broker to find potential lenders for you. Mortgage brokers specialise in finding lenders that offer suitable loans at low interest rates.
If you don’t want to do all the heavy lifting yourself, employ a mortgage broker and have them find the right loan for you.
Does a Mortgage After DMP Affect Your Credit Score?
If you’re continually failing to make monthly payments on your arrangement, it can have a very detrimental impact on your credit rating.
Again, a poor credit rating signals to potential lenders that you are a very risky investment.
When you apply for a home loan after your arrangement, some creditors may want to perform a hard search on your file, which could temporarily decrease your credit rating.
Otherwise, if you keep making regular payments on your arrangement and avoid hard searches on your file, you’ll find that home loans after your arrangement don’t really impact your credit rating in a negative manner for long.
Key Financial Points Creditors Will Look at while Lending
Let’s get right into it.
- Your income and financial status
One of the things that matters most to potential mortgage lenders is your financial status and your income.
They want to evaluate if your income is sufficient to be able to make payments on both your DMP and your mortgage loan.
If you’re struggling to make ends meet, most creditors won’t take a second look at you when it comes to seeing you as a potential borrower.
- Your credit score
Another pertinent factor when it comes to your application is your credit score. I cannot stress enough on the importance of having a good credit score.
If your DMP is active, which it will be if it has been less than six years since you got it (if you haven’t paid it off), creditors will be much less willing to loan you than if you have a DMP that has expired or no DMP listed at all.
Your credit rating may take a hit because of your DMP, and even more so when you apply for a home loan.
- The status of your DMP
Another important factor you need to take into consideration is how long your DMP has been active.
If your DMP is relatively recent, you’ll find that you’ll face a lot of difficulty finding creditors willing to loan you.
However, once a few years pass, and when your DMP is four to five years old, you’ll find virtually no difference in the way lenders and creditors treat you.
This is primarily because
Frequently Asked Questions – FAQs
Is it easy to get mortgages after a DM plan?
It does vary, however. If you have a great credit rating, go to a broker to find suitable loans at low interest rates, and wait till the end of your arrangement to apply, you may find it easy to get these loans after your arrangement.
On the other hand, if you have a very low income, a bad credit rating, and are seen as a risky investment, it won’t be easy for you.
Does a DM plan hurt my credit file?
Yes, a DMP can hurt your credit if you don’t know what you’re doing.
If you keep missing payments on your arrangement, it will eventually hurt your credit to the point where virtually no creditors will be willing to loan you.
If you act in a fiscally irresponsible manner, it will show up on your credit file.
What are the restrictions on mortgaging after a DM arrangement?
There are no real restrictions on getting a mortgage after your arrangement expires.
However, if your arrangement is still active, you may need permission from your arrangement provider/practitioner to apply for a mortgage, as you should, since home loans are very big investments.
Will I be eligible for a mortgage after a DM plan?
Yes, you will be eligible for a mortgage after your debt management arrangement expires.
As a matter of fact, you’re far more likely to attract lenders and creditors once your arrangement expires.
Once your arrangement is no longer listed in your report, more lenders will see you as a responsible borrower, particularly since they see you as someone who has put in effort to pay back their debt.
Wrapping it Up
While applying for a mortgage after your arrangement expires can certainly improve your chances of getting one, it can backfire if you don’t know what you’re doing and if you haven’t planned ahead.
I hope this guide helped you learn about your options if you’re facing a similar situation.
If you need more debt advice, feel free to reach out!