How to Secure a Mortgage with Debt Relief Order?

Debt Relief Order Explained

A Debt Relief Order (DRO) is a form of help provided to individuals with low income and minimal assets who cannot repay their debts. It’s a helping hand from the UK government to those swamped with debt. 

It essentially provides a break, usually for 12 months, during which your creditors can’t demand money, and you’re exempt from making payments towards most of your debts.

For instance, imagine you’re unable to repay a debt of £10,000. In such a scenario, you might apply for a DRO. 

If approved, this means you won’t have to make payments towards this debt for 12 months. After this period, if your financial situation is still tight, the debts included in the DRO are generally written off.

While a DRO can offer considerable relief, it also poses challenges, especially when it comes to larger-scale borrowing like a mortgage in the future.

Why are Dates Important for a DRO?

Dates are not only critical for remembering birthdays or anniversaries, but they also play an indispensable role in the context of a Debt Relief Order. 

The two most significant dates are when the DRO was registered and when it was discharged. These two markers in time can greatly influence your future borrowing capabilities.

Firstly, let’s understand why these dates matter. 

When you register a DRO, it is essentially a declaration that you can’t afford to repay your debts. Lenders, including mortgage providers, are naturally cautious about lending to individuals with a history of debt struggles.

The date you’re discharged from a DRO is also vital. It’s the point when you’re officially released from the debts included in your DRO. 

But it’s crucial to know that while you’re under a DRO, typically for 12 months, you’re not allowed to borrow more than £500 without informing the lender about your DRO.

These constraints extend to mortgages as well, which are considered large sums of money. So, while under a DRO, and for a certain period after discharge, applying for a mortgage is not advisable.

When Can You Apply for a Mortgage After a DRO?

This depends on individual lenders, as each has its own set of policies. 

Most lenders follow a waiting period of six years from the discharge date before considering a mortgage application. But, a few may consider applications earlier. 

The golden rule here is to wait at least 12 months from your discharge date before considering a mortgage. This waiting period lets lenders see that you’ve regained your financial footing post-DRO.

Another thing to keep in mind is how the length of time post-discharge can influence the amount of deposit you’ll need for a mortgage. 

For instance, if you’ve been discharged for just 12 months, a lender might ask for a hefty deposit, like 30% of the property’s value. This helps them offset the perceived risk of lending to someone with a recent DRO. 

On the brighter side, if you’ve been discharged for six years, the required deposit might drop to a more typical 5-10%.

Lastly, it’s crucial to understand that having a DRO in your credit history will likely limit your options when it comes to lenders. 

Not every lender is willing to consider mortgage applications from individuals who’ve had a DRO. Therefore, it’s important to seek professional advice to find those lenders who are willing to work with your specific circumstances.

How Much Can You Borrow Post-DRO?

The mortgage amount you can borrow will depend on a variety of factors. Let’s delve into them:

Your Income

Lenders look at your annual income as a measure of your ability to repay the loan. Usually, they might offer to lend up to three times your annual income. In some cases, they might even extend it to five times your income.

For instance, if your yearly income is £30,000, you could potentially borrow up to £90,000 or, in some cases, up to £150,000.

Existing Financial Commitments

Any existing financial obligations, like car loans or other debts, could affect how much you can borrow. Lenders need to be sure you can comfortably afford the mortgage payments along with your other financial commitments.

For example, if you earn £40,000 annually but have an existing car loan that takes up £10,000 each year, the lender might consider your effective income as £30,000 for the mortgage calculation.

Your Deposit

The size of your deposit can impact your borrowing capacity. A larger deposit could potentially open up more favourable lending terms.

Suppose you’ve managed to save a 20% deposit on a home that costs £200,000. In this case, you’ve got £40,000 upfront, which may improve the lenders’ willingness to lend more.

Employment Status

If you’re self-employed, it might be a bit more challenging as you’re seen as a higher risk. But, if you’ve got more than three years of accounts showing steady income, it could help convince the lenders about your loan repayment ability.

Self-Employment and DRO

Being self-employed can bring added layers of complexity when trying to secure a mortgage, particularly after a DRO. Here’s what you need to be aware of:

Detailed Financial Records. 

• Lenders like to see a steady income stream. As a self-employed individual, providing proof of this might be trickier. Typically, you’ll need to show a minimum of two years’ worth of accounts to give lenders confidence in your earnings.

Business Performance

• The lenders will look into your business’s health. The more profitable your business, the more likely they are to lend.

Debt to Income Ratio

• This ratio is key in assessing your loan eligibility. If your business debts are high relative to your income, it could affect your chances of obtaining a mortgage.

What Happens if There’s a Restriction on My DRO?

A Debt Relief Restriction Order (DRRO) is something that you might face if the Insolvency Service found your behaviour during your DRO to be dishonest or blameworthy. 

This order could extend the restrictions of a standard DRO from 1 year up to a maximum of 15 years. But how does it affect your mortgage applications?

1. Wait It Out – During a DRRO, you’re still bound by the restrictions of a normal DRO, which includes a prohibition from borrowing large sums of money. It means you’ll have to wait until the DRRO period is over to apply for a mortgage.
2. Full Disclosure – Honesty is crucial. If you’re under a DRRO, you’re legally obliged to tell the lender. Not doing so could lead to severe penalties.
3. Proactive Measures – Show lenders that you’ve taken steps to improve your financial situation. Even if you’re under a DRRO, actions such as saving a substantial deposit or clearing minor debts could boost your chances once the restriction period ends.

So, whether you’re self-employed or under a DRRO, a mortgage after a DRO isn’t an impossibility. It may take a bit of patience, planning, and proactive measures, but owning your own home could still be within reach. 

Bad Credit and Its Impact on Mortgage Applications After DRO

After a DRO, it’s no surprise that your credit might take a bit of a hit. Here’s a glimpse into what that could look like:

• Possible Credit Issues After-DRO:
• Missed payments
• High levels of existing debt
• County Court Judgements (CCJs)
• Default notices

But fret not, these issues don’t spell the end of your homeownership dreams. Here’s what you can do:

Steps to Mitigate These Credit Issues:

1. Stay Prompt. Commit to paying your current debts on time. It’s a simple but powerful way to rebuild trust with lenders.
2. Reduce Debt. Even a small reduction in your existing debt can be viewed positively by potential lenders.
3. Seek Professional Advice. Speaking with a financial adviser can provide tailored strategies to improve your credit score.

Checking Your Credit Reports to Prepare for Mortgage Application

Peeking into your credit report might seem like a daunting task, but it’s a step you simply can’t skip. Here’s why you should check credit reports before applying:

• To spot any errors or mistakes.
• To understand what lenders will see when they look you up.
• To be aware of any factors that could lead to a declined application.

Tips on Using Credit Reports:

• Know Your Score. Familiarise yourself with your credit score. A higher score usually means better loan terms.
• Dispute Errors. If something looks wrong, don’t hesitate to challenge it. Mistakes do happen.
• Monitor Regularly. Check your report regularly, especially in the months leading up to your mortgage application.

Pro Tip:

Remember, your credit report is a snapshot of your financial behaviour. Ensuring it’s in the best possible shape can boost your chances of getting a mortgage deal. So, roll up those sleeves, dive into that report, and let’s get you one step closer to your dream home.

Specialist Advice for DRO-related Mortgages

After a DRO, getting a mortgage isn’t just about picking a house and signing papers. Here’s why you need expert advice:

• Unmatched Expertise. Experienced brokers know which lenders might approve you despite a past DRO. They have
• Tailored Help. Everyone’s situation is different. Specialists give advice suited just for you.
• Save Time. Professionals help you avoid mistakes, making your application process smoother and faster.

So don’t go it alone; the right help can make all the difference!

Key Takeaways

• A DRO can impact your financial stability and borrowing potential, but it isn’t a lifelong sentence.

• The time of your registration and discharge in the DRO process play a crucial role in your mortgage application and potential borrowing amount.

• Self-employment and any restrictions on your DRO can complicate the process.

• Checking your credit report and mitigating credit issues are necessary steps.

• Professional advice is indispensable for handling the post-DRO mortgage process.

The Bottom Line

No matter your situation, your dream of homeownership isn’t out of reach. Yes, there are challenges, but armed with the right information and professional guidance, you’ll be well on your way!

So why not get started today? Take the first step towards your dream home. Get in touch with us, and let’s connect you with a good mortgage broker who can guide you in this exciting stage of your life.