Can You Get a New Mortgage While on a Debt Management Plan

Can you apply for a new mortgage while on a debt management plan? It is possible, but not advisable. In this article, Cashfloat will explain why.

Cashfloat is a UK short term loan company which helps people to overcome short term financial problems. As well as providing affordable loans, we publish helpful financial articles on our blog.

In this article, which is part of our guide to debt management plans, we will discuss whether or not it is possible to take out a mortgage while you are on a debt management plan.

Applying for a Mortgage While On a Debt Management Plan

If you are on a debt management plan (DMP) and want to buy a home you may be wondering whether it is possible to take out a mortgage before your DMP has finished. This is particularly likely for people whose debt management plan has been running for some time and where they are able to meet their DMP payments and cover their priority debts without too much difficulty.

There is no regulation to prevent you from taking out a mortgage, while you are on a DMP, however many people will find it more difficult to find a mortgage provider, while they are on their DMP, because of the effect it will have on their credit rating. While it is not impossible, fewer mortgage options are likely to be available and it will be likely that you will need to pay a larger deposit and a higher rate of interest. While it may be more difficult, many people will still be keen to try. If you do want to try and take out a mortgage, you can speak to a mortgage advisor to find out what your options are. It is also a good idea to talk your situation through with your debt management plan provider to assess whether it is a viable option or not.

How do Mortgage Providers Decide Whether or Not to Lend?

Mortgage providers lend large sums of money to people and, as a result, are quite particular about who they lend money to. Before they give someone a mortgage, they will want to know what the likelihood is of that person repaying the money. The less of a risk a borrower is seen to be, the more likely they are to get a mortgage. On top of this, more affluent and less risky borrowers are likely to get better mortgage deals.

Among the key things that mortgage providers look at, when assessing an application, are a borrower’s credit report and the amount of debt they have. Unfortunately, for people who are on a debt management plan, they will have outstanding debt and their credit score is likely to be poor.

Your Credit Report

While being on a debt management plan will not be displayed explicitly in your credit report, your creditors may have added a ‘payment arrangement’ note to your debts. This is known as a ‘DMP flag’ and tells lenders that you have been unable to repay previous debts under the conditions that you agreed to when you first borrowed money. Mortgage lenders will see you as more of a risk as a result of this. On top of this, the reduced payments you will have made towards your debts will, most likely, have harmed your credit score directly.

While having a poor credit score does not prevent you from taking out a mortgage, it will limit your options and make it likely that you will need to pay a larger deposit and a higher rate of interest for mortgages which are available to you.

Mortgage Amounts, Deposits and Interest

As we just said, after lenders have assessed your mortgage application, they will decide whether or not they will lend you money and under what conditions. If lenders will provide you with a mortgage, while you are on a debt management plan, it is likely that they will offer you a smaller mortgage. On top of this, they will also be likely to ask for a larger deposit and charge a higher rate of interest. This means that, while it is not always impossible to take out a mortgage while you are on a DMP, many people find that the reduced amounts on offer, deposit requirements and interest rates make them unaffordable or impossible to start.

Wait Until Your Credit Score Improves

Before looking into getting a mortgage to buy your own home it is often a better plan to completely clear your debts and to wait until your credit score improves. After you have cleared yourself of outstanding debts and your credit score has improved, mortgage providers will be far more likely to offer you favourable mortgage conditions. Your credit score is always likely to be poor while you are on a debt management plan and the best time to improve it is after you have finished it.

How To Improve Your Credit Score

After you have finished your debt management plan there are some simple ways you can improve your credit score:

• Check your credit report. By checking your credit report you will be able to correct any errors or misinformation which could be damaging your score.
• Register on the electoral roll. Being registered on the electoral roll helps lenders to verify your personal information and improves your credit score.
• Pay your bills on time! This is the most important thing. Make sure that you pay all of your bills on time in future. The longer you keep on top of your credit, the better your credit score will become.

Other Credit Options While On a Debt Management Plan

As well as it being difficult to get mortgages while you are on a debt management plan, other forms of credit will be harder to obtain as well. Like mortgage providers, other prospective lenders will also look at your credit score when they decide whether or not to lend you money. It will be hard to obtain other forms of credit and in many cases it will be impossible. On top of this, it is also usually inadvisable to take out new credit while you are on a DMP. Cashfloat recommends that you do not attempt to take out one of their payday loans or small personal loans while you are on a debt management plan.

In Summary…

For people who are looking to take out a mortgage while they are on a debt management plan, it is not impossible. However, it will be difficult and it is often better to wait until a debt management plan has finished and your credit score has improved before you start looking into mortgage options. If you are keen to try and find a mortgage provider while your DMP is still in place, then you can speak to a mortgage advisor and see what your options are.

Next up in this guide to debt management plans is an explanation of what happens to the interest charges on debts you are paying off with a debt management plan.

Chapter 10:
Does a Debt Management Plan Affect an Existing Mortgage?

Chapter 12
What Happens to Interest and Fees on a Debt Management Plan?