If you're considering enrolling in a debt management plan (DMP), you may be wondering if it will have an effect on your mortgage. The answer is no, a DMP will not affect your current mortgage. It's important to note that DMPs only cover unsecured debts, so mortgages and other debts secured by collateral are not eligible for inclusion in a plan. Student loans also cannot be included in DMPs.
If you keep up with your debt payments and your rent or mortgage, your DMP should have no direct effect on your home. To get a better mortgage deal, you generally need a good credit rating and a decent-sized deposit. This can be more difficult to achieve if you have a DMP, as every time you make a payment in your DMP, it can appear as an “underpayment” in your credit history. Even though you have an agreement with the people you owe money to, your monthly refunds are generally lower than the minimum required.
This is recorded as defaulted payments and therefore further lowers your credit rating. If your income increases and you can reduce your expenses, you could speed up your credit card debt payments and be ready to buy real estate sooner. Once your DMP ends and your debts are paid, your credit history will constantly improve and it will be easier for you to obtain a mortgage. A DMP may be ideal if you think your debts are getting out of control and can help you get your financial affairs back on track.
This can be useful if you participate in a debt management program and expect your credit profile to improve over time. There are also potential drawbacks to participating in a DMP instead of a different type of consolidation or debt repayment program. Typically, an agency starts with an initial one-hour counseling session, during which you will share the details of your financial situation and the counselor will help you prepare a personal debt repayment plan. Getting another loan and using the proceeds to repay other credit cards or loans can be an effective, low-cost way to make debt more manageable and ultimately pay off.
A debt management plan often includes agreements by creditors to waive late fees for past arrears and also to lower interest rates on outstanding balances. Many credit counseling agencies are nonprofit organizations that offer education and assistance to help people better manage their finances. Bankruptcy is a legal process that results in a court order that says you won't have to pay some of your debts. If you're worried about debt or are thinking about a DMP, you can get free advice from the UK debt charity StepChange.
A nonprofit credit counselor will review your debt and income situation at no cost and recommend ways to improve your status. If you spend more than you earn, or your debts are more than 40% of what you earn, or if you maintain month-to-month balances, it becomes less desirable. Debt management aims to improve credit without resorting to bankruptcy court, which can seriously damage creditworthiness. For example, if you consolidate your credit card debt with a fixed personal loan, your utilization ratio and credit score tend to improve.
