A reader asked about applying for a mortgage when she is in a Debt Management Plan (DMP):
“I have been in a DMP for 8 years and still have 6 to go as I still owe £16,000. With hindsight, I should have gone bankrupt!
My parents will give us a 20% deposit in 2021, but they don’t know about my debts so I can’t use their money to end the DMP. Will I be able to get a mortgage?”
I’ve written before about the general problem of getting a mortgage when you have debts, but this case highlights many of the specific issues around DMPs and wanting a mortgage.
This article also applies if you have made arrangements directly with your lenders or debt collectors. You may not think of this as a “DMP” but this sort of arrangement to pay is a form of debt management.
Would clearing the debts on your credit file help your credit score?
In debt management, some debts may have been defaulted. Others may be marked as “AP” which stands for Arrangement to Pay. Sometimes the debts aren’t marked at all, but just sit showing 6 months arrears.
Settling the debts that are still showing on your credit record, however they are marked, won’t directly help your credit rating and it won’t delete them from your credit record. They will drop off six years after the settlement date or, for defaulted debts, after the default date.
so for debts that haven’t been defaulted, the old AP/arrears markers will still be visible for 6 years after the debt is settled, showing that you had problems in the past.
It would be better if you can get the three creditors to put a default date on the debts which is over six years ago. Defaulted debts will always drop off your credit file after six years, whether you have repaid them or not, so with a default date of over six years ago, they would drop off your credit file immediately.
Even a default date of three or four years ago can be better if your DMP is still running.
This article What should the default date be? explains what you have to do.
Getting these AP/arrears debts off your credit record will considerably improve your score in a few years. But that’s not the full picture…
A great credit score doesn’t mean you will get a mortgage
Lenders don’t use these credit scores at all – they calculate their own. The credit reference agency scores are only useful as they pick up where you may have problems to resolve: a bad score and you are unlikely to get any credit, but a good score doesn’t mean that you will.
That’s why it’s not worth worrying about why Experian and Equifax have very different scores – no-one actually uses them! And why you shouldn’t fall for marketing hype about Boost increasing your Experian score – lenders don’t use that score so in the real world of a mortgage application it won’t help you at all.
This is especially important for mortgages. Mortgage lenders are fussier because they are lending you a large amount of money for a long while. They also have to use stricter affordability checks, so what you write on the mortgage application is just as important as what is on your credit file.
Debts matter even after they have dropped off your record
Just because a debt doesn’t appear on your credit file any longer, doesn’t mean it doesn’t exist or it’s not important
A debt can still be enforced by the creditor taking you to court for a CCJ. That would be a disaster for any mortgage application so you have to keep on paying these debts if you want a mortgage.
And mortgage lenders almost always ask for six months of bank statements, or for Open Banking access to your bank account which is just the hi-tech equivalent of bank statements. So they will see the debts that you are still paying or the payment to your debt management firm.
So even clearing the debts off your credit file means you still have a problem because the debts still exist. Basiucally they all have to be settled.
Two possible ways to improve your situation
Get lower settlements
The reader said she could pay the 3k to satisfy the three debts showing as AP and work towards clearing the other debts. But really they all have to go so her DMP ends – this will give her the best chance of getting a good mortgage offer.
Instead of settling the AP debts in full, she could try using the £3,000 to try to make full and final settlements on as much of the remaining debt as possible.
She has been in a DMP for a long while so some creditors may be prepared to take say 20% and most would probably take 33%, so perhaps offer 20% at the start? There isn’t a scientific way to work out what a creditor will accept.
National Debtline has a template letter for making this offer. Hopefully this small lump sum could then be used to clear 10k of your DMP. With a year until you are given the deposit, she may be able to blitz the rest of the debts down.
Are some of the debts unenforceable?
As these debts are old, it is likely most of them will have been sold to debt collectors. There is also a chance that the debt collector may not have the right paperwork for the debt… in which case they can’t take you to court. For debts that have already dropped off your credit record or will soon, this means you can simply stop paying them.
See Debts – why, how & when to ask for the CCA agreement which looks in detail at which debts this may work for and how to ask for the CCA agreement.
If this works, you will be able to pay off the debts that are enforceable sooner and will be able to save a deposit faster.
As the debts won’t be on your credit record by the time you apply for the mortgage, the mortgage lender will never see them.
DMPs and mortgages – summary
Being in a DMP makes it very hard to get a mortgage for three reasons:
- it damages your credit file
- it involves a monthly payment to your debts – this is a monthly commitment which goes into the “affordability” calculation
- it is a flag that you have had money problems in the past which are still persisting.
In 202o this became even harder as mortgage lending to first-time buyers with a low deposit dried up. But things may get back to normal in 2021 or 2022.
Is it impossible? Well if you have a large deposit there may be a “bad credit” lender that would lend to you – but that would be very expensive and it would be better to use some of the large deposit to end the DMP.
This particular reader has a clear way forward – she has a good chance of cleaning up her credit file by getting default dates added so the debts drop off and using full and final settlement to end her DMP.
This is going to take some time, but hopefully most of it will be completed before she is given the deposit in a year. If some of her debts are unenforceable, that will speed this up.
Many people with old DMPs will be in a similar situation – able to get debts to drop off their credit file and likely to have lowish full and final settlement offers accepted. You may feel reluctant to use some of the deposit you have been saving up to do this, but it is a good use of the money.
If your DMP was started less than six years ago, this is harder as defaults or AP markers will remain. For a very recent DMP, it will also be hard to get a low full and final offer accepted. You may be looking at several years of tough budgeting to clear the debts as fast as possible.
Updated in 2021