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 generous deposit next year, 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?
On my credit file a number of the defaults have dropped off and I am left with 3 creditors – 2 of which are showing AP. I could easily clear the debts ( 3K approx) to those creditors and settle those accounts and then work on clearing the other debts. Would that improve my credit score?
Also, do I have to disclose information with regard to outstanding debt that does not appear on my credit file when I apply for 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 an arrangement directly with a creditor or a debt collector. 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 these debts will help your credit rating, but probably not by as much as you might hope.
Settling the debts that are still showing, 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 the next six years, the old AP/arrears markers will still be visible, 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.
Your other creditors did this at the start and if you are paying so little each month to the debts there is a very good case for saying these other lenders should correct the AP markers to a default. 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. 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!
This is especially important for mortgages. Mortgage lenders are more fussy 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.
Must you tell lender about the DMP?
You have to be honest in answering any questions. Just because a debt doesn’t appear on your credit file, doesn’t mean it doesn’t exist or it’s not important – it can still be enforced by the creditor taking you to court for a CCJ for example. This will often be a big problem for someone in a DMP:
- you are very likely to be asked about debts on your mortgage application – you have to include the debts in your DMP even if they don’t show on your credit file;
- you will also be asked about regular outgoings, which will include the payment to your DMP. Most mortgage lenders ask to see bank statements etc so they would be able to see the payments you are making to your debts.
So even clearing the debts off your credit file means you still have a problem because the debts still exist.
A good way to improve your situation
You say you 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 your DMP ends – this will give you the best chance of getting a good mortgage offer.
Instead of settling the AP debts in full, you could try using the £3,000 to try to make full and final settlements on as much of your debt as possible. You have been in a DMP for a long while so some 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 10-15k of your DMP. With a year until you are given the deposit, you may be able to blitz the rest of the debts.
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.
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 done before she is given the deposit in a year.
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.