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What is a debt management plan?
A debt management plan (otherwise known as a DMP) is an agreement drawn up between you and your creditors to pay them back the debts owed. These include the debts that are considered ‘non-priority debts.
Priority debts are considered things such as mortgages, energy bills, tax bills and more. The reason they are ‘priority debts’ is because the implications of failing to pay them can have implications can be more serious, for example having your repossessed or not having energy in the home.
When you take a debt management plan, you agree to a set monthly payment which is then taken and distributed to your creditors. You do not deal with the creditors yourself, instead, they are dealt with by your debt management provider. StepChange is an example of a charity that sets up debt management plans. you can also find more information about debt management plans from Citizens Advice.
Your debt management plan is not legally binding but the implications of cancelling one or not sticking to the terms will likely hurt your credit file or ability to get credit.
People may often enter a debt management plan when they feel they can make the monthly payments on their priority debts such as the mortgage and energy bills but are struggling to make payments on the ones that can be included in a plan, such as loans and credit cards. Having one monthly payment may help people but there are also negatives to consider too.
For example, it can take longer to pay back your debts as you are paying a reduced rate, your creditors may not be willing to agree to the arrangement or it may show on your credit file which can have an impact on credit.
If you want to know how your debt management plan would affect a mortgage application, it’s always best to find a professional mortgage adviser.
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Does a debt management plan affect your mortgage?
Having a debt management plan would usually affect your mortgage. Most high street lenders, do not lend to people that are currently in a debt management plan and usually need people to have been out of the plans for several years, for example, three years.
There are however lenders that can consider people that are within the debt management plans. With these lenders, how the plan has been maintained throughout it can be particularly important, for example, if you went into the debt management plan two years ago, have payments been made successfully for this period?
Other factors are looked at when you take a mortgage such as an amount you have available as a deposit, the equity within the home if it is a remortgage, your level of income, how your income is made up, and total debts remaining, monthly payments, dependents and more.
As a result, it would be difficult for you to know if you would get a mortgage or the terms that would be offered without speaking with a professional mortgage adviser.
How long does a debt management plan stay on a credit report?
If you enter a debt management plan, this is usually seen on your credit report. The period that a debt management plan remains on your credit report is six years.
Adverse credit in general remains on your credit report for six years and at which point it then dropped off the report.
Lenders look at the credit reports of the applicants to see how they have been handling debts in the past to make sure that creditors have been paid and they have a reasonable credit score. As a result, it’s important to keep on top of how you are handling your credit commitments, so you continue to look attractive to lenders.
If I have had a debt management plan, would I use a special mortgage broker?
If you have had a debt management plan or are in one now, and thinking about taking a mortgage, you may be wondering what type of mortgage broker you need.
You do not necessarily need a specialist debt management plan mortgage broker; however, it would be recommended to look for a mortgage adviser that has the relevant experience in dealing with applicants that have had debt management plans.
Some mortgage advisers deal with adverse credit on a day-to-day basis so they may be best placed to match you with a suitable lender considering your situation alongside your debt management plan.
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If I have had a debt management plan, would I need to use a specialist mortgage lender?
However, this will depend on the application itself. For example, if the debt management plan expired several years ago, for example, three years, there may now be several lenders from the high street with competitive products willing to consider the application.
This may depend on a few things such as the applicant’s overall credit score, their income and the loan to value of the property.
if a high street lender was not willing to consider the application, many adverse credit lenders exist too who can accept debt management plans. Lenders that specialise in adverse credit mortgages often charge higher rates than the high street.
To know whether you would need an adverse credit lender or not, speak to an experienced mortgage adviser.
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It can certainly be possible to get a mortgage when you are in a debt management plan.
Like any mortgage though, there is a lot to consider. If you are thinking of taking a mortgage and wondering how your debt management plan will affect you, it’s always best to talk to a qualified professional mortgage advisor.
If you would like I NEED ADVICE to match you with an experienced mortgage advisor to talk to you about your situation and mortgage options, please complete the contact form.