Can I get a mortgage with a Debt Management Plan (DMP)

We ask, can I get a mortgage with a Debt Management Plan (DMP)? First, lets cover what a DMP is. Quick links are above or if you would like to speak to a specialist advisor, click here.

What is a Debt Management Plan (DMP)?

A Debt Management Plan (DMP) is an informal agreement, made between you and your creditors to help manage debt that you might be struggling with. A DMP is not legally binding and is intended for unsecured non-priority debts.

The DMP agreement helps you manage your repayments at a manageable amount and usually lowers the monthly instalments. Sometimes your creditors might agree to freeze interest, but this is at their discretion and not guaranteed.

How do Debt Management Plans (DMP’s) work?

You can negotiate a DMP with your creditors by using a DMP provider. Those in debt usually opt for a third-party negotiator, such as Payplan, to represent and negotiate, removing the stress of dealing with creditors.

To work out your monthly repayments you’ll need to put together a budget showing your income and expenditure. You’re not expected to live unreasonably, living costs need to be accounted for but you will be expected to try and put as much as possible towards repaying your debt. You might need to provide documents such as your pay slips and bills to support your budget proposal. A debt management company, such as Payplan can help you with this.

Your budget will be presented to your creditors, who will decide whether they will accept your proposal. If your proposal is accepted and your creditors are happy with the suggested monthly repayments, they may even freeze interest. You’ll usually pay your debt in full, but with more manageable single monthly repayments.

Many people in DMP’s find paying one monthly payment to their DMP provider, who then distribute that payment amongst the creditors, far easier and less stressful than paying multiple creditors various sums. It can make the debt far more manageable, but it isn’t legally binding so it’s important to remember creditors can take legal action at any point during a DMP. If the creditor has accepted the repayment arrangement and you keep up with the payments it is less likely that the creditor will take legal action.

What debts are included?

Not all debts can be included in a DMP. Debts are often grouped into ‘priority’ and ‘non-priority’ debt. DMP’s are designed for non-priority debt.

Priority:
  • Mortgage and rent arrears
  • Secured loans, for example against your home
  • Court fines
  • TV Licence
  • Gas/Electric arrears
  • Council Tax arrears
  • Child support/ maintenance
  • Income Tax arrears
  • National Insurance arrears
  • Hire Purchase agreements for essential items

Non-Priority:

  • Personal Loans
  • Credit card debt
  • Store cards/catalogue debt
  • Payday loans
  • Bank loans
  • Building society loans
  • Overdrafts
  • Debt to friends or family

Who can get a DMP?

Debt Management Plans are designed for those who have enough disposable income to make reasonable repayments and for non-priority debts. This means that you’ll still need to pay off any priority debts while paying your DMP and taking care of living costs, so it’s important you have enough disposable cash to do so.

They also depend on creditors agreement; however, lenders often want to work with those in debt usually agreeing to reasonable repayment plans as this increases the likelihood of repayment and helps prevent credit issues like bankruptcy.

Pros of a DMP:

  • DMP shows willingness to co-operate with creditors and intention to pay in full
  • Creditors might freeze interest and charges
  • Can reduce monthly repayments
  • Using a DMP provider can help reduce the stress of dealing with multiple creditors
  • Help manage unsecured debt
  • Making a single payment can help you budget

Cons of a DMP:

  • It’s not guaranteed that your creditors will freeze the interest on your debt
  • It can take several years to repay your debt
  • Creditors are still free to take legal action against you and aren’t legally required to cease contact
  • You will still need to pay your debt in full

Your credit score will probably take a negative impact

How will a DMP affect my credit report?

A DMP doesn’t actually get recorded on your credit report as a sole record, but any credit issues surrounding it will be. It’s likely any missed payments and defaults you’ve had leading up to your DMP would have caused a drop in your credit score, additionally the reduced repayments you make during your DMP will also make an impact. Missed payments and defaults stay on your credit report for 6 years, but accounts you have with creditors included in your DMP could be marked with a ‘DMP flag’- this shows that creditors are aware of the lower payments and have agreed to this.

Getting a mortgage with a Debt Management Plan

Remortgage with a DMP?

Even if you’ve had, or are currently in, a Debt Management Plan (DMP), there are plenty of mortgage options available. If you have enough equity in your home, you could look at a remortgage, allowing you to free cash tied up in your home and potentially raise a lump sum to clear your DMP.

It’s unlikely highstreet lenders would accept an application with a history of bad credit, but our brokers work with specialist lenders who consider all applicants.

Second-charge mortgage with DMP?

If you’re a homeowner and want to free up equity without leaving your current mortgage, you could consider taking a second-charge mortgage against your home to free up equity tied in your property. This could allow you to access a lump-sum to clear your DMP while keeping your current mortgage intact.

As second-charge mortgages are secured loans, the risk isn’t as great to potential lenders, increasing your chances of approval and could even gain you access to better deals and products.

Can I get a mortgage with a Debt Management Plan (DMP)?

Getting a mortgage while in, or after a DMP can seem like a daunting task, but it could be possible. It’s likely you’ll struggle to find a highstreet lender who will consider your application, but at Clever Mortgages our expert brokers work with specialist lenders, experienced in helping people with bad credit find their perfect mortgage.

Improve chances of getting a mortgage with a DMP:

Save up a larger deposit:

As with most bad credit circumstances, a larger deposit vastly increases your chances of getting your mortgage application approved. With a larger deposit, it means the amount you need to borrow is less, resulting in a lower loan to value (LTV) ratio. A lower LTV makes you a better prospect and less risky for a lender, meaning you’re more likely to get a better interest rate. This might not be plausible while in a DMP, as you’d be expected to use that money to go towards your debt. Once your DMP has finished and your debt is clear, you could consider using the money that would have gone towards repayments to save a larger deposit.

Employment:

Like with all credit agreements repayment ability is a big factor. Having stable employment, or consistent employment in the same field helps boost your application and make you a more attractive borrower.

Keep up repayments:

Make sure you keep up all credit and DMP repayments. Missing payments can impact your credit score further and could risk your creditor taking further action. Keeping up your repayments can help show potential lenders that you can be a responsible borrower and over time will help repair your credit score.

Electoral roll:

Make sure you’re on the electoral roll. This will help lenders confirm your identity and address.

Close old accounts:

If you’ve got any old credit account that you’re not using, make sure you close them. Having many open accounts can negatively impact your credit score, so closing unused ones can help boost your score.

Keep track of your credit report:

There are three main credit reference agencies in the UK, Experian, Equifax and TransUnion. You can view your credit report online using these agencies. Your credit report shows you what lenders can see when they’re considering you for credit and keeping track of your report can help you better understand your credit and what influences it.

Avoid multiple credit applications:

If you’re looking for a mortgage with a DMP, you might struggle to find a mainstream lender that will accept your application and making several failed applications in a short space of time can further impact your credit report.

Going through a specialist bad credit broker like Clever Mortgages can help you find lenders that are likely to accept your application, sometimes accessing better rates and deals through the specialist lenders we work with.