What is a Debt Relief Order (DRO)?

Sometimes considered ‘bankruptcy-lite’, a debt relief order is a form of insolvency that is used if the debtor owes less than £20,000 and has less than £1,000 in assets. Due to the specific criteria for applying, a DRO is only issued to people who do not own a house and do not have a mortgage, thus for many who have come out of one, looking to a mortgage represents the improvement in their personal finances and the chance of an improved life.

A DRO consists of a period (officially called the ‘moratorium’) during which time they cannot undertake any new debt. Once the period ends, however, they are cleared of previous debt and can rebuild their credit record on their way up to a new mortgage.

Are prospective lenders willing to offer a mortgage to someone with an on-record DRO?
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How to get a mortgage after a DRO – how long does a debt relief order last?

A debt relief order is merely one of the many things that can happen during someone’s life that can lead them to have a bad credit report – and just like other instances of adverse credit, it’s possible to successfully obtain a mortgage despite it. It’s not necessarily simple, nor can it be done without a little work and understanding, but here at The Mortgage Hut our specialists are keen to share their understanding and happy to roll up their sleeves to do a little work!

Before the debt relief order

If you are struggling with your present level of credit and considering applying for a DRO then it is highly unlikely that you would be able to obtain a mortgage, nor would we advise you to do so. However, should it be the case that you do, the existence of the mortgage and your property as an asset will render you no longer valid for a debt relief order and you will have to pay both the mortgage and all other outstanding debt as normal.

During the moratorium

Unfortunately, it is illegal for anyone currently midway through the DRO period to apply for significant new credit, so no matter how willing a mortgage lender might be, there’s no way to get a mortgage during this time.

After the DRO is cleared

The six years following the moratorium, the debt relief order will show in your credit report as a serious event. Some lenders will have a hard rule that simply states that they are unwilling to lend to anyone in the first six years following the discharge of the DRO, but many are more flexible.

Like any bad credit, the amount of time that has passed since the DRO is a large factor. Showing that the financial difficulties that led to the relief order are no longer a concern is a big part to improving your chances of a mortgage and that can only be done with time and a good subsequent credit record.

Once six years are passed

After six years, the DRO will fall away from your credit history and will no longer form part of the file. You will be free to undertake a mortgage based on standard criteria as though the DRO period never happened.

Investigating the DRO – the lender’s risk assessment

If you want to get a mortgage in the years immediately following the DRO, then you will need to provide all details regarding the order to the prospective mortgage lender.

While some lenders will not adjust their basic policies by the DRO specifics, others will take account of the type of debt that has been cleared and base future borrowing on it. For example, a cleared credit card debt is unlikely to invoke the particular interest of a future lender but erasing a large tax bill might be considered more significant.

Each lender will have their own attitude to the details and may look to increase your deposit size or offer a higher rate of interest once everything is taken into account.

Debt relief restrictions orders

If you failed to follow the rules imposed by the debt relief order, then you may have been served a debit relief restrictions order (DRRO) which includes an extension of the moratorium and other notes attached to the order. In this case, lenders are more likely to see you as a higher risk and either reject and application or offer adjusted terms. Any extension will also knock back the date of your discharge from the DRO.
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Poor credit in your life after a debt relief order

Running up debt and showing adverse credit in the years following a completed debt relief order is going to be seen extremely negatively.

Lenders are likely to ‘upgrade’ the impact of your poor financial administration and see less than serious credit black marks, such as a simple missed payment or bounced direct debit as an indication that the DRO didn’t help as it should.

Any lenders still considering you for a mortgage will want to look closely at the details of your subsequent bad credit and if there are too many similarities between the reasons for the DRO and later issues (for example, defaulting on a credit card when credit card debt formed part of the original order), then it will seriously affect your application.

It is important that you are especially careful with your credit following a DRO if you want to apply for a mortgage.
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for a mortgage. How much deposit do I need to get a mortgage after a debt relief order?

One of the factors that is going to be strongly affected by your debt relief order is the loan-to-value (LTV) size of the mortgage and consequently, the deposit you will need to have.

The longer the time it has been since your DRO completed, the less of a factor it becomes, but during those six years it will have an impact on the deposit most viable lenders will expect, as can be seen from the following table.

Remember that other factors, such as the reasons for the DRO may affect these numbers and they should be considered a guide only.
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Debt relief orders due to being self-employed

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A failed small business can lead to an application for a debt relief order and when applying for a mortgage as a self-employed person in the following years, the earlier DRO will be a large factor.

This is especially significant if the nature of the failed business is similar to any new venture.

Even with three years of full accounts detailing strong growth, a lender is likely to question the wisdom of returning to a business idea that failed so absolutely and may choose to reject or adjust an application on that basis.

Obtaining a mortgage with a bad credit history

At The Mortgage Hut we are experts in helping customers get a mortgage despite a poor credit report. Our team can separate the debt relief order facts from the many myths and will help you see through the mist to the bright future ahead.

 Contact us today to rid yourself of fears regarding any past debt relief orders and let us find a suitable mortgage for you. Just pick up the phone or fill out our contact form to have one of our professional advisors get back to you!

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