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08/11/2018

Can I get a Mortgage With A Debt Relief Order?

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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.

 

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?

What is a Debt Relief Order (DRO)?

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.

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.

With that in mind, the DRO must prove that you absolutely cannot afford your debts and that you will be more financially capable once the DRO has ended.

Why choose Carrington Dean?

  • Write off unsecured debts over £5,000.
  • Stop interest and charges soaring.
  • Reduced payments from £85 per month.

How do Debt Relief Orders impact your credit report?

Your credit report, often referred to as your credit history, is a detailed record of your entire financial history, including loans, mortgages, transactions, and other debts.

Creditors will keep an eye on your existing borrowing and refer to your credit file when considering whether to lend money to you in the future.

If you have bad credit or a patchy credit history, you may struggle to have a mortgage application accepted – there are few mortgage providers lending to people with bad credit, which is why so many people turn to bad credit mortgages.

Like any formal debt solution, a Debt Relief Order will have an impact on your credit record. That’s because the use of a debt solution sends a signal to lenders that you have struggled to repay credit in the past. It’s important to remember that the damage to your credit will only be temporary, and better overall than falling into default over outstanding debts.

So can I get a mortgage with a Debt Relief Order?

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.

Is it easier to get mortgage approval after Debt Relief Orders?

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.

How we helped Yvonne

“I never thought I’d be in this situation in a million years but knowing that I had somewhere to turn for support and the arrangement has been an absolute life saver. It has made a huge difference to our financial situation."

Yvonne, Wishaw

Get help like Yvonne did

What are bad credit mortgages and should I consider one?

It’s difficult to find a mortgage lender or mortgage broker who will offer a reasonable mortgage rate to a person with a poor credit record. Specialist lenders are aware of this, which is why there is an entire industry built around bad credit mortgages.

Bad credit mortgages are mortgages offered by ‘specialist lenders’ and specifically targeted at people with poor credit. They work in exactly the same way as regular mortgages, except how much deposit you will need, how much interest you pay, and what you owe in additional charges are all likely to be significantly higher than with a regular mortgage.

This is because a person with bad credit is viewed as higher risk to a mortgage broker. A specialist lender will ask you to mitigate that risk by paying more for their product, which can lead people with bad credit into even more financial problems.

Before you even consider a bad credit mortgage, you should seek professional advice. There are many websites around that provide mortgage advice from an online mortgage advisor, or you could reach out to an organisation like the Mortgage Advice Bureau.

Are there alternative debt solutions 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 remainder 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.

Where can I get debt relief and mortgage advice?

Just because you’ve had problems with your finances in the past, doesn’t mean you shouldn’t look forward to a more financially stable future. That includes the right to own a comfortable home at a reasonable rate.

Maybe you’re considering a Debt Relief Order and are worried about whether it will limit your access to mortgage lenders, or you’re worried that your bad credit will affect your ability to access an affordable mortgage deal.

Either way, we can help. At Carrington Dean, we’re Scotland’s debt specialists. Our expert advisors can give you the information you need to regain control of your finances, take care of unpaid debt, and even walk you through the mortgage process for someone in a debt solution.

For specialist finance advice and information on how to get a mortgage after a Debt Relief Order, talk to one of our team today on 0800 043 1320.

You could write off up to 70% of your unsecured debt today

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