Getting a Mortgage with a Debt Management Plan

How Does a Debt Management Plan Work?

A debt management plan (DMP) is a way to help people manage their debts more effectively. It works by reducing the amount you owe into manageable monthly payments, which can help you regain control of your finances.

A DMP can be a lifeline for people who feel their debts are spiralling out of control.

To set up a DMP, you will need to work with a debt advisor or DMP practitioner. This professional will act as an intermediary between you and your creditors, arranging a repayment plan that fits within your budget. This allows you to repay your debt at a more manageable and affordable rate

By understanding how a DMP works, you can better understand how it may impact your chances of securing a mortgage. 

If you have a DMP, you will need to disclose this to lenders when you apply for a mortgage. Many lenders will still consider your application, and some may even offer you a mortgage if you have a settled DMP.

What Debts Can a Debt Management Plan Settle?

A Debt Management Plan targets non-priority debts. These encompass:

• overdraft facilities
• personal lending
• loans from banks or building societies
• borrowed funds from friends or relatives
• dues from credit cards, store cards, or payday loans
• catalogue, home credit, or in-store credit debts.

What Debts are not Covered by a Debt Management Plan?

A Debt Management Plan does not cater to priority debts. These involve:

• court penalties
• TV Licence
• Council Tax
• bills for gas and electricity
• child support and maintenance payments
• Income Tax, National Insurance and VAT
• mortgage or rent, including any loans secured against your property
• hire purchase agreements, especially if they finance essential items.

Can I Get a Mortgage with a Debt Management Plan?

Yes, it is possible to secure a mortgage with a Debt Management Plan. But, this path is not without its challenges. 

When applying for a mortgage with a DMP, whether active or completed, one may encounter a mix of reactions from lenders. 

Some may be hesitant due to the associated financial risk, while others may be more understanding of your circumstances.

The key to unlocking the door to homeownership lies in your approach. Not all lenders view DMPs in the same light. 

Specialist lenders, for instance, are experienced in dealing with unique situations like these and may have more flexible lending criteria. 

They can evaluate your circumstances, considering factors such as income, Loan-To-Value (LTV) ratio, and credit score along with the presence of a DMP.

Good mortgage advisors with access to the whole market, who are adept at handling cases involving debt issues, can prove invaluable in this scenario. They can guide you towards lenders more likely to accept your application, ensuring you don’t miss out on potential opportunities.

But, be cautious when it comes to approaching lenders by yourself. It might seem tempting to try your luck, but this gamble could inadvertently harm your credit file. 

If your application is declined, it can leave a negative mark on your credit report, making future lending even more difficult.

How Much Can I Borrow if I’ve Had a DMP?

A common guidepost suggests that having a DMP could limit you to borrowing up to four times your annual income. But, this isn’t a hard and fast rule. 

With a larger deposit and the absence of severe credit issues, you might even be able to borrow up to five times your annual income.

If your DMP is still active, lenders will factor it into your affordability assessment as a monthly outgoing. 

But keep in mind, each lender evaluates your DMP as an expenditure differently, based on their unique scoring system. Therefore, choosing the right lender can mean the difference between borrowing an adequate amount or falling short.

For self-employed individuals, the situation can be even more complex. Mainstream lenders may offer limited options due to the perceived instability of self-employed income. 

But, specialist lenders understand the unique challenges of self-employment and can offer more flexibility. This is especially true if you have been self-employed for a year or more.

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Can You Get a Mortgage with Bad Credit and a DMP? 

A debt management plan (DMP) can be the result of financial difficulties, which can lead to borrowers having other credit issues alongside their DMP.

You can still get a mortgage even if you have CCJs, defaults, delayed payments, bankruptcy, IVAs, or repossession alongside your DMP. 

There are specialist lenders who cater to people with adverse credit histories, but your options may be limited if you have other credit issues. If your credit problems are severe, your choices could be even more restricted.

It would be impractical to give you a personalised answer without examining your mortgage needs and credit history. But, experienced mortgage advisors are available to discuss your situation in more detail.

Mortgage Deposit Requirements and Debt Management Plans

As with all mortgages, the more substantial your deposit, the more lenders you can access and possibly at better rates. But, what if your financial past has left you with a smaller deposit?

Let’s take a scenario where you have a 5% deposit. While this might seem minimal, it’s still feasible to get a mortgage even with a DMP in your credit history. 

To make this possible, you could consider Mortgage Guarantee Scheme. But, this option usually requires a clean credit file.

In more complex situations where you’ve encountered other credit issues such as County Court Judgements (CCJs) or defaults, you may need a higher deposit – around 15-20% to sway lenders in your favour.

Before making any mortgage application, a smart move would be to examine your credit file. This will give you an understanding of what lenders see when assessing your application and help you fine-tune your strategy.

How a Settled DMP Can Improve Your Mortgage Chances

Once your debt management plan (DMP) is settled, your path to getting a mortgage becomes much clearer. Lenders are more likely to approve your mortgage application if your DMP is no longer active, and you may even be able to get a better interest rate.

Settling your DMP frees up your monthly income, which can increase your borrowing power. If your DMP has been settled for over three years, you will have a wider range of lenders to choose from. 

Some lenders may even offer you attractive rates, which could save you money on your mortgage.

But, if you have any new credit problems after completing your DMP, this could complicate your mortgage application. 

Lenders may be less likely to approve your application, and you may have to pay a higher interest rate. You may also have to put down a larger deposit.

Working with a DMP Mortgage Specialist

For anyone who’s had a DMP, we can’t emphasise enough the value of consulting with a mortgage specialist. 

These professionals possess a comprehensive understanding of the market and are well-versed in debt solutions. They can efficiently guide you through the process and increase your chances of approval.

A specialist can assess your unique circumstances, understand your needs, and match you with lenders best suited to your specific criteria. 

Remember, mortgages can be complicated, but with an expert on your side, you are better placed to deal with them.

The Bottom Line

Getting a mortgage with a DMP, whether active or settled, is entirely possible. It is a path that is full of challenges, but it can be successfully traversed with the right approach.

Here are the key takeaways:

• A settled DMP enhances your borrowing power and can unlock access to preferential rates.

• High street lenders may be reluctant to approve a mortgage if you have an active DMP or one that has recently been settled. Specialist lenders can be more accommodating.

• Ensuring that your credit file is in good shape before applying for a mortgage can improve your chances.

• A DMP mortgage specialist can guide you through the process and match you with the most suited lenders.

Seeking professional advice is crucial to making informed decisions, particularly when dealing with something as significant as securing a mortgage. 

Let us match you with a broker who specialises in DMP mortgages. It’s a free service designed to make the process easier for you. Reach out to us today and begin your journey to homeownership!