If you have been or are currently in a Debt Management Plan (DMP), you might wonder how this impacts your ability to get a mortgage. The good news is that there are mortgage options available, whether you’re currently in a DMP or have completed one.
Let’s explore what a DMP is, the available mortgage options, and practical steps to improve your chances of mortgage approval.
What is a Debt Management Plan (DMP)?
A Debt Management Plan (DMP) is an informal agreement between you and your creditors to repay your debts at a reduced rate over an extended period. It’s a way to manage debt repayments more affordably by agreeing to smaller monthly payments that fit your budget. A DMP is typically arranged through a third-party organisation, such as:
- Money Advice Service – https://moneyadvice.co.uk/
- PayPlan – https://www.payplan.com/
- Step Change – https://www.stepchange.org/
These organisations offer free advice and can help you set up a DMP tailored to your financial circumstances.
Can You Get a Mortgage While in a DMP?
Yes, it is possible to get a mortgage while you have a DMP, but it may require a more tailored approach. Lenders will assess your financial situation, including your income, expenses, credit score, and how well you have been managing your DMP payments.
While mainstream lenders may be cautious, there are specialist lenders who understand the circumstances of borrowers in a DMP.
What Lenders Consider:
- Credit Score: A DMP will likely lower your credit score. However, showing a history of timely payments can demonstrate financial responsibility.
- Debt Levels: Lenders will look at your total debt and your progress in paying it down.
- Payment History: A consistent history of payments on your DMP shows lenders that you’re managing your finances responsibly.
Mortgage Options While in a DMP
There are mortgage options available if you are in a DMP, including:
- Mortgages whilst within the DMP
If you’ve just entered a DMP or have been in a DMP for several month’s / year’s and have maintained a good payment history, you may qualify for a mortgage with specialist lenders. These lenders consider your payment consistency rather than focusing solely on your credit score. If you have just entered the DMP it will also be dependent on your credit file and when the defaults were registered.
- Second-Charge Mortgages
A second-charge mortgage allows you to borrow against the equity in your home without affecting your current mortgage. This can provide a lump sum to pay off your DMP.
- Remortgaging with a DMP
If you own a home, remortgaging can help you access equity to settle your DMP. Specialist lenders can offer remortgage products for those in a DMP.
- Equity Release
If you are over 55 and looking to release equity from your home while in a Debt Management Plan (DMP), there are options for you. Some Equity Release Lenders may require the Debt Management Plan (DMP) to be settled on or before receiving the funds.
Improving Your Chances of Getting a Mortgage
While getting a mortgage with a DMP may be challenging, you can take steps to improve your chances:
- Save for a Larger Deposit
A larger deposit reduces the loan-to-value (LTV) ratio, making you a less risky borrower. While saving during a DMP might be difficult, once your DMP is completed, consider using freed-up funds to build a deposit.
- Stable Employment
Having consistent employment in the same field shows financial stability and improves your borrowing profile.
- Keep Up with Repayments
Maintaining all DMP and credit repayments on time is essential. Missed payments can further damage your credit score.
- Join the Electoral Roll
Being on the electoral roll helps lenders verify your identity and address, making your application more credible.
- Close Unused Accounts
Closing unused credit accounts can improve your credit score by reducing your available credit limit.
- Monitor Your Credit Report
Check your credit report regularly through agencies like Experian, Equifax, or TransUnion. Understanding your report can help you identify areas for improvement.
- Avoid Multiple Credit Applications
Avoid making multiple credit applications in a short period, as it can negatively impact your credit score. Instead, work with a mortgage broker who can find suitable lenders for your situation.
Why Use a Specialist Mortgage Broker like Clever Mortgages?
A mortgage broker with experience in bad credit scenarios can:
- Identify Suitable Lenders: Brokers know which lenders are more likely to accept applications from individuals in a DMP.
- Access Exclusive Deals: Some mortgage products are only available through brokers.
- Guide You Through the Process: A broker will assist you in preparing your application and gathering necessary documentation.
Clever Mortgages have extensive experience helping clients with DMPs.
How Does a DMP Affect Your Credit Report?
A DMP itself is not directly recorded on your credit report. However, missed payments, defaults, and reduced payments will impact your credit score. Creditors may flag accounts as being part of a DMP, which shows lenders that you’ve agreed to pay reduced amounts. These flags remain on your report for up to six years but diminish in impact over time as you demonstrate responsible financial behaviour.
Key Considerations for Homeowners in a DMP
If you already own a home, a DMP won’t directly affect your homeownership. However, it may impact:
- Equity Access: You could access your home’s equity to consolidate debts.
- Mortgage Payments: Ensure your mortgage is included as a priority debt in your DMP budget.
- Future Borrowing: A DMP can affect your ability to remortgage or take out another mortgage. However, most lenders allow product transfers without a credit check.
Final Thoughts
Getting a mortgage while in a Debt Management Plan is possible but requires careful planning. By maintaining good payment habits, working with a specialist broker, and improving your financial profile, you can improve your chances of mortgage approval. If you need advice, speak to Clever Mortgages for guidance, they may be able to help even before you decide whether a Debt Management Plan is right for you.
