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Debt management plan mortgage

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 8, 2023

Debt management plan mortgage

You took out multiple loans. Most were for your business, others were for purchasing personal items, one of which includes your prized possession – the latest iPhone and there’s nothing wrong with that.

Then, the unthinkable happened. Maybe the pandemic hit, and you were furloughed. Maybe you lost your job. Maybe you fell ill, but whatever the case, you could not keep up with the repayments, and before you knew it, creditors were on your neck.

You decided to do the responsible thing, so you met up with each of your creditors and set up a debt management plan (DMP). That way, you could start channelling your income towards settling the financial obligations that were wrecking your life and, unfortunately, your credit.

Now your finances are on the up-and-up, and you’re considering getting a mortgage. Is it possible? Can you get a debt management plan mortgage? What kind of deposit would you need with bad credit?

This guide explores the answers to these questions, specialist mortgage lenders, why your should use a mortgage broeker and more. Read on.

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Is it possible to get a debt management plan mortgage?

Yes, it is. Having a DMP on your credit record does not preclude you from securing a mortgage. That said, lenders examine applications on a case-by-case basis, so getting approved for a mortgage ultimately depends on your specific circumstances.

Right off the bat, the first thing lenders look at when assessing your application is whether your DMP is still active. If it is fully settled, they’ll want to know how long ago you paid off your debts.

On the other hand, if at the time of your application, you still have active DMPs, then you might have a harder time securing a mortgage, especially from a high street lender. Banks, for instance, will not even consider your application if they find an active DMP when looking into your credit history.

Regardless of your DMP status, the good news is – there are specialist lenders out there with a higher risk appetite who would be more than happy to consider your mortgage application. You need to know where to find them and be willing to potentially accept slightly less competitive terms. That’s a small price to pay, in our opinion.

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What criteria do lenders use to vet applicants with a DMP?

Debt management plan mortgage criteria vary widely between different lenders. Those with a lower risk appetite tend to have stricter requirements, which will likely lock out potential borrowers with a DMP in their credit history. Specialist lenders with a higher risk appetite will likely have more flexible terms.

Regarding requirements, there are some notable differences between applying for your run-of-the-mill mortgage and a mortgage when you have bad credit, which is essentially what a DMP does to your credit record.

DMP status

Timing is of the essence when applying for a debt management plan mortgage. Different lenders have different rules when it comes to how soon after the completion of a DMP, they’ll consider a mortgage application.

Mortgage providers open to granting mortgages to borrowers with ongoing DMPs will want to see that it has been in force and properly maintained for a minimum of 12 months. This communicates to the lender that you are managing your finances well.

On the other hand, mainstream lenders don’t leave much wiggle room in their requirements. They want to see that the DMP is fully satisfied and require borrowers to wait for a specific timeframe – anywhere from 1-3 years – before they can even consider their mortgage application. Once that period elapses, most lenders completely disregard a DMP on your credit report when assessing whether or not to approve you for a mortgage.

It’s always a good idea to wait before applying for a mortgage if you still have an active DMP or have recently satisfied one. Doing this will significantly increase your chances of getting a competitive mortgage deal.

Deposit requirements

Getting a standard mortgage with a 10% deposit requirement for people with good credit is practically a walk in the park. If you have bad credit – not so much. Mortgage lenders require prospective borrowers with poor credit history to lower their loan-to-value ratio (LTV) as much as possible. A lower LTV means putting down more money towards the deposit.

Depending on how adverse your credit issues are, most lenders will require you to deposit at least 15-25% of the mortgage value. A lower LTV isn’t necessarily a bad thing. It lowers the lender’s risk exposure, making it more likely for them to loosen their grip on rigid terms and give you a reasonable interest rate.

A lower LTV also gives you more bargaining power to negotiate other eligibility requirements. This, however, is only possible when your DMP has been satisfied.

Credit history

While it might seem pointless for lenders to consider your credit report when you already have an active or satisfied DMP, they are more interested in the bigger picture. They’ll want some background to your credit woes.

What were the circumstances that led to the DMP? Was the DMP an isolated event? Do you have multiple DMPs? If you have an active DMP, are you keeping up with the payments? If you have been bankrupt it will be harder to get a mortgage however, some lenders may look at a loan with a higher LTV.

Context is important for lenders when assessing your debt management plan mortgage eligibility. Aside from your DMP issues, they also want to see whether you have any other residual bad credit issues, such as defaults, arrears, or late payments.

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How much can you borrow if you have a DMP in your credit history?

Most lenders base the mortgage limit on a standard multiplier of 4-4.5x your annual income.

This applies to borrowers with a DMP who secure a mortgage through specialist bad credit lenders. That said, increasing your borrowing limit by up to 5x your annual income is possible if you make a large deposit to lower your LTV and your credit report has no major credit issues.

If you have an active DMP, lenders who would be willing to approve your mortgage application will first do an affordability assessment taking into account your DMP payments as part of your monthly recurring expenditure.

Every lender has its own set of criteria they use to calculate your mortgage affordability. Each one has its unique scoring system to measure a realistic mortgage repayment schedule based on your circumstances.

Lenders also consider your income when determining what mortgage value to approve you. This is especially important if you are self-employed since you have to contend with a limited pool of lenders if you go the high street lender route.

Specialist lenders specifically deal with bad credit borrowers. They offer more flexible terms and competitive rates compared to what you would get from mainstream lenders.

Can you remortgage with an ongoing debt management plan?

Remortgaging a loan follows the same process as applying for a new mortgage from scratch, with a few minor differences. One option would be to switch from your current mortgaging product to a different one, allowing you to remortgage while leveraging your relationship with your current lender. If you have a debt management plan mortgage, your existing provider will likely be open to your remortgaging despite the DMP.

There’s also the option to free up some of the equity in your home, which translates to a lower LTV. Lenders would view this as a move in the right direction, especially if you have bad credit. You can then channel some of that equity towards clearing your outstanding debts, including your DMP(s), and wipe the slate clean.

Most lenders would be willing to consider this when recalculating your mortgage affordability since several of your other monthly repayments will be decreased or eliminated entirely.

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Can you get a debt management plan mortgage for a buy-to-let?

Suppose your mortgage application is for a buy-to-let and your credit history reveals that you have a DMP. In that case, you will encounter similar hurdles to borrowers applying for residential mortgages.

The rules of the game don’t change, only that in this case, instead of just looking at your personal finances, they will also examine the business case for the buy-to-let property as well.

You would need to demonstrate to your mortgage provider that you have previous experience as a landlord, provide verifiable rental income projections for the property you want to purchase, and show that there’s a high market demand for similar properties in the area it is located.

If you can prove to your lender that the buy-to-let is a viable investment, it will go a long way in mitigating the negative impact of your debt management plan.

Consult a debt management plan mortgage broker

If you use the conventional application route to apply for a mortgage when you have a DMP on your credit report, there’s a good chance that most high street lenders will turn you down. If it’s active, they won’t even consider your application.

What you need is a specialist debt management plan mortgage lender. These providers are known for their higher risk appetite and higher-than-average mortgage approval rates for borrowers with adverse credit issues, including DMPs.

How can you find them? By getting in touch with a bad credit mortgage broker. They have insider knowledge of the whole market to help you secure a loan with a provider that will give you favourable terms.

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How long after the completion of a DMP can I secure a mortgage?

There’s no standard waiting period. Depending on the lender, it could be anywhere from a couple of months to several years. High street lenders tend to have longer waiting periods which could run as long as three years.

On the other hand, specialist lenders have little to no waiting time. They examine mortgage applications on a case-by-case basis to determine the severity of the credit issues. In some instances, they even grant mortgages to borrowers with active DMPs. A specialist bad credit broker will assess your application and help you secure a mortgage with a specialist lender that’s likely to approve you for a property loan.

Will a DMP show up on my credit history?

A DMP won’t appear as a “debt management plan on your credit file.” What will appear is the outstanding debt you have with creditors with whom you’ve set up the DMP. You can request the relevant credit reference agencies to add a note explaining each of the DMPs you have with your respective creditors. That way, a potential mortgage lender can see that you’re acting in good faith to settle your outstanding debt.

Will a DMP limit the mortgage amount I can borrow?

A debt management plan will have a direct impact on your mortgage affordability.

DMPs consist of regular monthly repayments, forming part of monthly recurring expenses. A mortgage lender will consider this when calculating the real estate value you can realistically afford.

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