Debt management plans and mortgages

Find out how a DMP can affect your mortgage application and what you can do to help your eligibility.

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Mortgages for people on Debt Management Plans (DMP)

With a cascade of information relating to borrowing money and the requirements of various lenders, it can sometimes be confusing when you're looking at your potential for obtaining a mortgage from a lender. Given the precarious nature of the financial world over recent years, many people have found themselves in debt and are now left wondering whether any lender will lend to them again.

Mortgage lenders are having to adapt to the times and are now increasingly considering offering mortgages to those who have been in debt and even to those who have been made bankrupt or have had their home repossessed in some cases.

As a consequence of the financial hardship many are currently facing, debt management plans are a fairly common occurrence in the modern world. Our expert mortgage brokers are able to advise you as to whether you will be able to obtain a mortgage with a debt management plan history. There are many different factors that are taken into account by lenders before approving a DMP mortgage.

DMP background

A debt management plan is an agreement entered into between a debtor and creditor in order to pay off all of the debts owed. They are usually entered into when the debtor is only in a position to pay their creditors a small payment every month or if the debtor has financial problems but will be in a position to make the repayments within a few months. Such plans can be organised by yourself directly with the creditors they may also be carried out via a licensed debt management company who would normally deal with everything on your behalf for a fee.

This would include setting up the plan and working out the monthly payments owed. They would obtain all the details regarding the financial situation including the assets, debts and income of the debtor and the details of the creditors in order to proceed with setting up the plan. The company will also contact the creditors and request that they agree to the suggested plan. The creditors are not, however, obliged to do so. If a debt management plan is arranged through a company, the debtor has to make the regular payments direct to the debt management company and the company will divide the payments out between all the creditors.

Even if a debt management plan is entered into, the creditors will still have the option to ask the debtor to pay the full outstanding debt at a later stage in time and are therefore still entitled to take proceedings to recover the outstanding debt even if the debtor is sticking to the plan and continuing to keep up with the payments.

Debt management plans can only be set up in respect of ‘unsecured’ debts i.e. debts that are not guaranteed against your property and it is possible for them to be cancelled if repayments are not maintained in accordance with the plan.

Getting a mortgage with DMP history

Many people will be asking, can you get a mortgage after a debt management plan. As this is a specialist area, it is extremely important to obtain advice from an expert in this field. Not all lenders will be willing to lend in such circumstances and, should you choose to go direct to a high street broker, they may not have access to all the lenders who would be willing to lend to you. It is always best, therefore, to do your homework and make sure you are seeking out the most informative, accurate advice from somebody who has access to the wide variety of lenders who may consider providing you with a mortgage with a debt management plan history.

The good news is that it is possible to obtain a mortgage if you have a current debt management plan and also to obtain a mortgage if you have had such a plan in the past. It is, however, important that you meet the criteria which are standard for mortgages including credit history, affordability and income. In addition, you will need to have provided enough of a deposit to make it viable for the lender to proceed.

What is the reason for the difficulties people may face in getting a mortgage with debt management plan?

Many people struggle to find a mortgage with debt management plan for a number of different reasons. Firstly, it is not obvious for most people where to look for relevant lenders and, furthermore, many brokers mistakenly believe that the mixture of a debt management plan and a mortgage is not possible. High street lenders tend to dismiss anybody who applies with a current debt management plan. Many also dismiss those who apply with history of a debt management plan dating back to any time within the last six years.

It is imperative that expert assistance is sought out, as it is not easy attempting to locate deals on your own. As we mentioned above, many brokers are unable to access the lenders that may be willing to approve a mortgage with a DMP. An applicant could find himself or herself in a position where a high street broker has taken all the details only to turn them away, hence wasting time or, where the broker has decided to apply on your behalf to the wrong lender in a ‘hope for the best’ approach but, in reality, the lender would never make an offer in such circumstances. Unnecessary credit searches against the credit history in your name can negatively affect your position further.

Our mortgage brokers can help you work through this minefield! We understand the process can sometimes be daunting but you can be reassured that, once you are in the right hands, there are options available to you.

Mortgages available for people with current debt management plans

As logic would suggest, it can be slightly more difficult to obtain a mortgage if you are currently on a DMP than to obtain one where you have a historical DMP. But, it is possible to do so and several specialist lenders will offer a competitive rate for these mortgages, especially given the increasing number of lenders willing to open their minds and consider borrowers with DMP. The main factors that will be taken into account for those applying with a DMP that is active are:

Additional credit history

It is common for borrowers who have a historical DMP or a current DMP to have other credit problems. There are usually other issues such as County Court judgments, defaults, late or missed payments or mortgage arrears that have an impact on applications. Although one of these issues may be accepted by many specialist bad credit lenders, the addition of a DMP debt makes it less palatable for a significant percentage of lenders. Each borrower obviously comes with a unique position but, as a general rule, if you have a current DMP, you can also have:

  • A few defaults (a maximum of two registered within the last two years and any number before this time)
  • A few late payments (a maximum of three months late normally)
  • A few County Court judgments (a maximum of two registered within the last two years and any number before this time)

If there are any more serious issues involved such as a bankruptcy, a repossession or an IVA within the last six years AND you have a current DMP, it is very unlikely that an application will be accepted. Although a handful of specialist lenders may be willing to consider bankruptcies IVAs and repossessions on their own, adding a DMP will severely limit the options for borrowing.

Equity/Deposit required & affordability

With a DMP, you are still able to get an approval for a loan to value up to 95 per cent in accordance with the Help to Buy scheme. However, for this to come into play, you would need to have a history without defaults or County Court judgments within the last three years. If you do happen to have any such defaults or judgments showing within the last three years, you would probably need in the region of a 15 per cent equity/ deposit allowing you up to an 85 per cent loan to value.

Affordability and income

The criteria for this varies depending upon whether the lender is a main lender in the high street or whether they are a specialist provider of DMP mortgages. It is possible for you to borrow up to five times income depending upon circumstances, especially if a generous deposit is provided and there are no other bad credit problems.

The affordability is also affected by the ongoing monthly payment figure for the DMP if it is not paid off when the mortgage is completed or prior to that point. Some mortgage lenders will calculate based upon the DMP payment figure per month and some will look at the payment figure of the original agreements for credit.

The category of income you receive is also important to lenders. Although standard lenders tend to have rules which are somewhat restrictive in this area, the specialised DMP lenders tend to be more flexible and are willing to accept people who, for example, have been self-employed for just a year or who are company directors who need to utilise the retained profits as opposed to dividends drawn.

Mortgages available for people with historical Debt Management Plans

As discussed above, it is a little easier to secure a mortgage if your DMP is historical (and particularly if it was paid off more than three years ago). The factors taken into account by mortgage lenders are similar to those for people who have paid the DMP during the last three years. However, the affordability is increased in comparison with applicants who plan to continue with the DMP following the start of the mortgage. In this case, the borrowing could be anything up to five times income on the basis that there are no other sizeable monthly outgoings.

The options are greater for those who want a mortgage if they have had a DMP but it was paid over three years ago. Far more lenders will be inclined to consider their application and, for that reason, the rates will usually be competitive.

As always, if any other poor credit problems have occurred after the settlement of the DMP, for example, a County Court judgment, they will have a significant impact on the type of lenders who are willing to consider an application from you. When additional poor credit problems are thrown into the mix, there will only be a few specialist lenders who will require a maximum number of two defaults or judgments within the last two years and up to 85 per cent loan to value. Larger deposits in the region of 35 per cent could possibly persuade lenders to lend to you but you will still very likely be affected by rates which are not as competitive and higher initial start-up fees.

We appreciate that there is a lot of information to digest and our mortgage brokers are more than happy to clarify any points raised above or answer any questions that you may have in relation to a mortgage with debt management plan. Please feel free to contact us to enable us to help you make a decision as to the best way forward.

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