Can I get a mortgage with a debt management plan?

It is possible to get a mortgage while on a debt management plan, however it might harm the chances of your application being approved.

If you use a debt management plan, it will harm your credit score and could prevent you from accessing the best mortgage deals.

Nevertheless, it’s far from impossible to be approved for a mortgage if you have a debt management plan. There are plenty of lenders that will still consider your application, even if some will immediately refuse you.

In fact, there are a number of lenders that specialise in finding deals for applicants who are suffering from these sorts of credit problems.

Ultimately, a lender’s decision is likely to be based on your overall credit history, including the financial behaviour that resulted in your debt management plan in the first place.

Speak to a specialist lender

If you are struggling to get a mortgage via the traditional methods you could speak to a specialist lender. They can provide the expertise on a particular area of lending where you’re looking for assistance.

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Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

What is a debt management plan?

A debt management plan (DMP) provides a way for you to consolidate multiple debts into one affordable monthly payment.

If you’re struggling to pay your debts, you can approach a DMP provider who will negotiate a repayment plan that’s more manageable.

This involves making a single monthly payment to your DMP provider, who distributes funds to creditors on your behalf.

When you apply for a DMP, some creditors will stop charging interest on your debts as a goodwill gesture, although this doesn’t always happen. There’s no guarantee your creditors will stop contacting you either.

What’s more, although your monthly payments will be lower, it’ll take you longer to pay off your debts.

A debt management plan can only be used for non-priority debts, such as unpaid bank loans or credit cards. You’ll have to continue paying priority debts, such as mortgage, rent, gas, electricity or tax arrears directly to your creditors.

Why does a debt management plan harm my mortgage application?

When you register for a debt management plan, this will be noted on your credit report and remain there for six years. It’s a clear indication of reckless financial behaviour and will significantly lower your credit score.

Mortgage lenders use your credit report to assess your likelihood of making timely mortgage repayments – and many will be put off when they spot a debt management plan on your file.

It’s likely the missed payments that made a debt management plan necessary would have already damaged your credit score, making it even harder to be approved for a mortgage.

How likely is it that I’ll be approved for a mortgage with a debt management plan?

The more time that has passed since opening your debt management plan, the less weight lenders will place on it during the assessment of your credit report.

If you’ve fully paid off your DMP provider, this will be noted on your credit report and will improve your chances of being approved for a mortgage.

Nevertheless, there are some lenders that will simply refuse applicants with a debt management plan on their credit report. Others won’t consider you if you applied for a debt management plan in the recent past.

If you’ve also suffered county court judgements (CCJs), defaults or individual voluntary arrangements (IVAs), it will be even harder to be approved for a mortgage. It’s important to check a lender’s minimum eligibility criteria for its policy on these scenarios before submitting a mortgage application.

Tips for building your credit score

It’s possible to repair your credit score, even if you’ve been forced to take out a debt management plan. This will improve your chances of being accepted for a great mortgage deal in the future. Here are some tips to help you improve your credit score as quickly as possible.

  • Make debt repayments on time. Timely debt repayments will boost your credit score, while missed repayments harm it further. A debt management plan will help lower your monthly debts, making it easier to pay them on time.
  • Apply for a credit-builder credit card. Credit-builder credit cards are designed to help people repair their bad credit scores. It’s possible to be approved for these cards, even if you have a debt management plan on your credit file. By spending a small amount on this card and paying it off in full each month, you can boost your credit score.
  • Don’t apply for too many financial products. Applying for additional credit produces a short-term dent in your credit score, so avoid doing so unless absolutely necessary, especially in the months leading up to a mortgage application.
  • Fix your credit report. Check your credit report for errors and amend any you find. You can do this at no charge by contacting one of the three major UK credit reference agencies: Equifax, Experian or TransUnion (Callcredit).

Bottom line

While a debt management plan helps you to make your debts more affordable with monthly payments, it harms your credit score and can prevent you from getting the best deal on a mortgage. Luckily, time heals all wounds, and the further away you are from the DMP, the better your chances are of getting a mortgage. If it’s fully paid off, this will be noted on your credit report and can help put the odds back in your favour, depending on the provider.

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