Getting a Mortgage with a Debt Management Plan (DMP)

What is a Debt Management Plan

It can be tough getting a mortgage if you’re on a Debt Management Plan (DMP) but it’s not impossible. A DMP is a method for paying your debts by making reduced payments to your creditors and while it can help you to get your financial affairs back in order, it can also affect your ability to get credit in future, including a mortgage.

The good news is that there are some high street lenders and specialist lenders who are DMP friendly and will consider borrowers who have had historical DMPs when applying for a mortgage.

In this guide, we’ll examine what lenders look for, how a DMP could impact your chances of being accepted for a mortgage, and which lenders are more open to approving a mortgage for someone with a debt management plan (DMP).

How Does a Debt Management Plan Affect Getting a Mortgage?

In short, a DMP is a formal agreement with those you owe money that allows you to pay off your debts at an affordable rate. Having a debt management plan (DMP) in place may not be marked on your credit file, but the missed payments or defaults that caused you to have a DMP in the first place will be registered, and these can have a negative impact on your credit score.

The DMP itself will not appear on your credit record, but the debts still outstanding will. Lenders would also consider your credit history and your general financial health when you apply for a mortgage. Rebuilding your credit score is essential regardless of whether your DMP is settled or ongoing.

Key factors that affect your ability to get a mortgage with a DMP include:

1. Whether the DMP is Still Active or Completed

If you’re still in a Debt Management Plan, lenders are typically more wary. If you completed your DMP and have shown good financial conduct after this, you are more likely to be accepted for a mortgage. Many will also ask that your debt management plan (DMP )has been ongoing for at least 12 months before they consider you.

2. Missed Payments or Defaults

The missed payments or defaults that led to your DMP can affect how lenders view your mortgage application. If these issues are recent or numerous, they may impact your chances of approval. However, if they are older and you’ve shown improved financial behaviour, many lenders will be more flexible. Missed payments and defaults will stay on your credit report for six years, influencing your credit score. Remortgaging while in a DMP could possibly lead to paying back more interest overall due to a longer borrowing term.

3. Deposit Size

A larger deposit can offset some of the risks associated with a history of poor credit. Lenders are more likely to offer a mortgage if you can provide a deposit of 15-25% or more. This reduces the lender’s risk and shows that you’ve worked to improve your financial situation. A larger deposit improves your chances of getting a mortgage with a DMP. The interest rate on a remortgage while in a DMP may be higher than if you didn’t have a DMP.

4. Affordability and Income

Lenders will want to ensure that you can comfortably afford the mortgage repayments. Demonstrating a stable income and manageable debt-to-income ratio is critical when applying for a mortgage after a DMP.

Debt Management Plan (DMP) Providers

Debt Management Plan (DMP) providers are organisations or companies that help individuals manage their unsecured debts. They do this by negotiating with creditors and arranging a structured repayment plan to help make their DMP repayments.

These providers typically act as intermediaries between the debtor and their creditors, helping to reduce monthly payments, freeze interest rates, and, in some cases, halt collection actions or legal proceedings.

Types of DMP Providers:

1. Charitable Organisations:
   • These are non-profit organisations that offer free or low-cost debt advice and help set up and manage a DMP. They may also offer ongoing support throughout the plan. Examples of charitable DMP providers include:
     • StepChange Debt Charity
     • National Debtline
     • Citizens Advice Bureau (CAB)
2. Commercial Debt Management Companies:
   • These are for-profit companies that charge fees for their debt management services, typically for setting up and managing the DMP. Some well-known commercial providers include:
     • Payplan
     • free debt management services (part of the StepChange group)
     • Debt Free Direct
3. Debt Counselling Services:
   • These services offer personalised financial advice, including helping individuals set up a DMP. They may charge fees or offer free services depending on their business model. Examples include:
     • Creditfix
     • Wilson Field

Key Considerations:

• Fees: Some providers charge fees for their services, while others, especially non-profits, offer free advice and support. It’s essential to understand all costs before committing to a provider.
• Regulation: Reputable DMP providers are regulated by the Financial Conduct Authority (FCA) in the UK, which ensures that they operate fairly and transparently.
• Service Offering: While some providers offer comprehensive services, including negotiating with creditors and distributing payments, others may only provide initial advice or a one-time consultation. Always ensure the provider’s services meet your needs.

Choosing a DMP provider should be done carefully to ensure the organisation is trustworthy, regulated, and capable of offering you the best chance of managing your debt effectively.

Improving Your Chances of Getting a Mortgage After a DMP

If you’ve been on a Debt Management Plan and want to improve your chances of getting a mortgage, follow these steps:

1. Complete the DMP

Most lenders like your DMP to be finished before they’ll look at your application for a mortgage. This demonstrates that you’ve responsibly handled and paid off your debts, which has the potential to raise your credit score.

2. Stable Income

Lenders will first assess your current income and employment status. They want to know that your income is consistent and sufficient to meet not only your mortgage payments but also your everyday living costs. This includes your salary, business income (if self-employed), or any other regular sources of income (e.g., pension or benefits). A steady income stream reduces the risk of missed payments, so lenders prefer applicants with secure employment or reliable income. If your property has enough equity, you could consolidate your outstanding debts into one mortgage repayment.

3. Debt-to-Income Radio

Lenders will calculate your debt-to-income ratio to see how much of your monthly income is already allocated to repaying debts, including the DMP. A higher percentage of your income going towards debt repayments can reduce the amount available for a mortgage. The more manageable your existing debt obligations (including the DMP), the better your chances of approval. A lower debt-to-income ratio is viewed favorably because it suggests that you have more financial capacity to take on new credit.

4. Track Record of Repayment

Lenders will also examine how consistent and reliable you’ve been with repayments since completing the DMP. If you’ve made regular payments on the debts included in the plan and your credit report shows a trend of responsible financial management, it indicates that you are likely to maintain good payment habits moving forward. You may need to provide additional documentation explaining your DMP’s circumstances to lenders when applying to remortgage.

Lenders may look for evidence that your financial behavior has improved and that you are now able to meet financial commitments without falling back into difficulties.

5. Check Your Credit Report

Before you apply for a mortgage, look at your credit report to make sure everything is in order. If such errors or inaccuracies exist, have them disputed and corrected to increase your chances of being accepted for a mortgage. Any lender who runs a credit check can see that you’ve been making underpayments each month to particular debt commitments.

Also being registered on the electoral roll helps lenders confirm your identity and improve your credit score.

The majority of lenders use credit reference agencies like CheckMyFile, Experian, Equifax, and TransUnion to assess an applicant’s creditworthiness when applying for a mortgage. These agencies provide detailed credit reports that show a person’s credit score, credit commitments, and payment history across various financial products, such as loans, credit cards, and existing debts. By analysing this data, lenders can determine an applicant’s financial reliability, identify any missed payments or defaults, and assess their overall risk.

A DMP will not necessarily be noted on your credit report unless a creditor asks for a ‘DMP flag’ to be added.

A strong credit history with a good credit score typically increases the chances of mortgage approval, while any negative marks like missed payments or defaults can influence a lender’s decision.

6. Save for a Larger Deposit

Having a deposit saved up for the mortgage will be crucial, especially if you have a DMP in your history. The LTV ratio available to you will be affected by your credit history, especially with a DMP. A larger deposit typically 15% to 25% of the property’s value. This shows that you are financially responsible and can manage your money effectively. It also lowers the lender’s risk, as you are seen as less likely to default on a mortgage if you have a solid deposit in place. Savings can also indicate that you have the financial discipline to handle long-term commitments.

7. Living Costs and Other Outgoings

Lenders will also review your annual income and living expenses, such as rent, utilities, and other regular financial commitments, to understand how much disposable income you have after covering your bills. They want to make sure that, after paying your essential outgoings, you have enough left to cover the mortgage payment comfortably. This is particularly important after a DMP, as lenders want to ensure you are not over-stretching your finances.

8. Seek professional advice

A specialist mortgage broker can help you find lenders that are more open to applicants with a history of a Debt Management Plan (DMP). They can also assist in improving your application by presenting your financial recovery in the best light through the mortgage process.

9. Show Financial Stability

Lenders will look at your current financial situation, so it’s essential to show that you’ve regained financial stability. Make sure you’re not missing any current payments and that your income can support the mortgage you’re applying for.

High Street Lenders Who May Offer Mortgages After a DMP

While many mainstream lenders are cautious when it comes to offering mortgage with a DMP, some may consider your application, especially if your DMP was completed several years ago. This will be based on the lenders lending criteria Here are a few high street lenders who may offer DMP mortgages, depending on their circumstances:

Specialist Lenders for Mortgages After a DMP

If high street lenders are not an option, you may need to work with a specialist lender who understands bad credit and is more willing to offer mortgages to individuals with a Debt Management Plan (DMP). Many specialist lenders may credit search rather than credit score. This helps borrowers with low credit scores.

Here are some of the specialist lenders who are more flexible with applicants who want a DMP mortgage.

Conclusion

Getting a mortgage after a Debt Management Plan can be more challenging, but it is by no means impossible. While many high street lenders are cautious, there are both high street and specialist lenders who may still offer a mortgage, especially if your DMP is completed and you’ve demonstrated financial recovery. Lenders such as Pepper Money, Aldermore, and Precise Mortgages are more open to working with applicants who have a history of DMPs, while Halifax, Nationwide, and Barclays may consider applications if the DMP is older and has been settled.

To improve your chances of securing a mortgage, its worth seeking professional advice. A specialist mortgage broker will help focus on and rebuilding your credit. By taking these steps, you’ll be better positioned to secure a mortgage after a Debt Management Plan (DMP) and move closer to homeownership.

Seek Professional Advice from a mortgage specialist

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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