We are commonly asked if its possible to get a mortgage with a recently settled debt management plan and the answer is usually more positive than people expect. However, the details are important and whilst a debt management plan might be acceptable to a lender, the underlying effect on your credit report might not be.
What is a Debt Management Plan?
A Debt Management Plan (DMP) is where an intermediary such as Stepchange look at your debts, look at your income and work out how much you can comfortably afford each month. They then take a payment from you each month and share this out between your creditors. You can do this for loans, overdrafts, credit cards and other unsecured debts, you cannot pay tax or mortgages this way.
What does this mean for my credit?
What usually happens when a debt is late consistently is that the lender records it as a default after a certain amount of time. They have decided that the contract has been terminated and then they start recovery action. If you pay less than the minimum payment, then you will find that each month puts you further behind and at a certain point the lender will automatically record it as a default. That’s doesn’t have to happen, but it is very common, and it should be assumed that accounts repaid through a Debt Management Plan will be closed at some point and a default recorded on your credit file.
What does this mean for getting a mortgage?
Debt Management Plans don’t always get recorded on your credit profile specifically. Often a lender will place a note on the file to clarify that the payments are being made through a Debt Management Plan but its not mandatory and its unlikely that mortgage lenders when they download a credit report as part of a mortgage application will see this.
The way we would assess your ability to get a mortgage following a Debt Management Plan would be whether all of the credit that was recorded as defaulted has been settled. It is very difficult and very expensive to take a mortgage whilst there are defaulted loans outstanding. Once they have been settled then the amount of the default and the time elapsed since they were registered will be factored.
As a result we have a more detailed write up about the effect of credit defaults and mortgages here that you should refer to.