If you’re using a Debt Management Plan (DMP) or considering starting one, you might be wondering if getting a new mortgage is even possible. The truth is, obtaining a mortgage while dealing with significant debt can be challenging, especially if you have entered into a formal debt management solution. However, that’s not to say it’s not out of reach.
Several factors come into play, such as the specifics of your Debt Management Plan, your credit score, and your overall financial health. Simply understanding how these different variables interact is crucial for anyone in this situation.
With this in mind, in this comprehensive guide we answer the most common questions asked when it comes to DMPs and mortgages. This includes how a DMP impacts your chances of getting a mortgage, in what way a DMP can affect existing mortgages, and what other options you may have if you find yourself in this position.
Can you get a mortgage with a DMP?
A Debt Management Plan is an agreement with your creditors to significantly reduce the amount you pay towards your debts each month, making them more manageable within your budget. This option is often chosen by those in serious debt as a way to regain control of their financial situation.
Unlike more formal arrangements like Individual Voluntary Arrangements (IVAs) or Bankruptcy, a DMP is not legally binding and can be adjusted to suit your changing financial circumstances. However, unfortunately this doesn’t mean that using a DMP will not impact your chances of being approved for a mortgage.
Understanding the implications of a DMP on your financial future, particularly when it comes to significant financial commitments like mortgages, is essential. Below, we explore the ways in which a DMP could impact your home buying plans.
How does a DMP affect getting a mortgage?
Despite its informal nature, entering into a Debt Management Plan can have repercussions in terms of your credit rating and your ability to borrow money. This includes your ability to secure a mortgage. However, while it may be difficult to obtain a mortgage when in a DMP, it is by no means impossible.
The fact is, when applying for a mortgage, lenders closely examine your financial history. Naturally, if you are using a DMP, this will flag during these checks, potentially highlighting you a risk as a borrower.
The current economic climate in the UK has led banks to tighten their lending criteria further in recent years, favouring applicants with high incomes, good credit ratings, and substantial deposits. Unfortunately, most individuals in a DMP typically have lower credit scores and less savings, making it harder to convince lenders of their creditworthiness.
However, this is not as black and white as it may seem. Below, we take a look at a few of the options people in this situation may still have open to them.
What are your options?
Although difficult, it is not impossible to get a mortgage while on a Debt Management Plan provided you can persuade the bank that you are no longer a risk to lend money to by:
- Improving your credit rating
- Making payments to your creditors on time
- Living within your means
On top of this, some lenders specialise in offering mortgages to those with less-than-perfect credit histories, including those in a DMP. However, it’s important to note that these types of lenders do tend to charge higher interest rates.
That being said, it is possible. And by improving your credit score, saving for a larger deposit, and demonstrating financial stability over time, you can enhance your chances of securing a mortgage.
It may also be beneficial to seek advice from a mortgage broker who understands the nuances of borrowing with a DMP and can guide you towards suitable lenders.
How long after a DMP can you get a mortgage?
If you have tried to get a mortgage while still using a DMP and failed, you may need to wait until you have completed your plan and repaid your debts. However, then the question arises: how long do you have to wait post-DMP before a mortgage application is successful?
Well, the waiting period can vary depending on several factors. Generally, lenders prefer to see a history of financial stability and responsible credit management post-DMP. This often means waiting for at least 12 to 24 months after completing your DMP before applying for a mortgage.
During this waiting period, it’s essential to focus on rebuilding your credit score. You can do this by paying all your bills on time, reducing any remaining debts, and avoiding taking on new, unnecessary credit. Additionally, saving for a larger deposit can significantly improve your chances of securing a mortgage, as it reduces the lender’s risk.
As discussed above, some lenders may have specific policies regarding post-DMP applicants, so it’s beneficial to research and approach those who are more open to lending to individuals with a history of debt management.
How will a DMP affect your existing mortgage?
Finally, if you already have a mortgage and are worried how entering into a DMP to pay off other personal debts may impact it, rest assured, these plans do not directly affect the terms of your existing mortgage. However, it is important to note that a DMP will impact your overall financial situation and credit score. In turn, this can potentially affect your ability to refinance or secure favourable terms on a new mortgage in the future.
For this reason, it’s important to keep up with your mortgage payments while on a DMP to avoid further credit issues. If you have concerns, communicate with your mortgage lender to discuss your situation and explore possible solutions.
