Can I get a Mortgage With A Debt Relief Order? - Carrington Dean stars-five-icons

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08.11.2018

Can I get a Mortgage With A Debt Relief Order?

An important element of the Debt Relief Order (DRO) is that it heavily restricts you financially and has a very strict eligibility criteria. This is because, if successful, your debt may be written off entirely so the DRO must prove that you absolutely cannot afford your debts and that you will be more financially capable once the DRO has ended.

The DRO works by freezing your debt for 12 months. If your ability to pay your debts has not improved after a year, your remaining debt is written off.

Owning your own home is an important dream for many people in the UK. This means that mortgages are a crucial issue when you are considering a debt solution.

Just because you are currently in a difficult financial situation, doesn’t mean there isn’t hope for the future. There are a number of debt solutions you can consider for a variety of mortgage situation, but can a mortgage work with a DRO?

It is impossible to have a mortgage with a DRO

For once, there is a quick and easy answer – no. You cannot have a mortgage with a DRO and you take out a mortgage while you have a DRO.

This is because the DRO is designed for people who do not have assets or equity that could settle their debts. Similarly, you must have debts less than £20,000 in England and Wales, or £15,000 in Northern Ireland. You also cannot own a car worth more than £1000.

If you did own a home, it is expected that you may be able to re-mortgage or downsize your home to repay your debts, and could, therefore, pay off your debts with another insolvency solution in the future.

Even if you currently have negative equity, having such a potentially big asset disqualifies you from having a DRO.

If you dream of taking out a mortgage, you cannot do this while in your DRO. But, don’t despair, your dream could still become a reality one day. A DRO lasts only for 12 months.

After this period of time, you are able to apply for a mortgage. It is worth noting, however, that your credit score is likely to be very low. This will both be a hangover from your previous debt problems, and because your DRO is placed on your credit report for a total of 6 years from its approval.

It is worth investing time into rebuilding your credit score before you take out a mortgage to increase your chances of having an affordable deposit and interest rate.

What if I have a mortgage already?

If you have a mortgage or own your home, you cannot apply for a DRO, regardless of your equity situation. There are alternative debt solutions that you can consider, however, and here are a few for you to consider.

  • An Individual Voluntary Arrangement (IVA):

The IVA is a formal solution available in England, Wales and Northern Ireland, making it a direct alternative for the DSO. You must work with an Insolvency Practitioner to calculate your surplus income, which is then proposed to your creditor as an affordable monthly payment.

If approved, you will only have one, lower payment to make, your interest and fees are frozen, and your creditors will no longer be able to contact you. These payments generally continue for 6 years, before writing off the reminder of your debt. Most crucially for your house, you are never expected to sell your home; although you may be expected to release it’s equity to put towards your debt.

  • A Trust Deed:

A Protected Trust Deed is considered the Scottish equivalent of the IVA, and the principle of one reduced, affordable repayment based on your genuine surplus income is the same.

Similarly, although you may be asked to release equity, you are never asked to sell you home. The biggest difference, however, is that repayments generally last only 4 years, rather than 6.

  • A Debt Management Plan (DMP):

Trust Deeds and IVAs are both legal solutions that involve you being placed on the insolvency register. If you are concerned about the impact this could have your credit score, you may want to consider an informal solution like a DMP.

A DMP can be organised and proposed entirely by you, and it involves you calculating a lower repayment to offer to your creditors. You can’t just pick any number, your creditors will want to see your calculations so that they know you are giving them as much as you can.

The informal nature of this solution means that your creditors are not legally bound by this agreement, unlike an IVA or Protected Trust Deed. This means any one of them could object and refuse to accept your new payment, they are not obligated to freeze your interest, and they can change their mind at any time.