Can I Get a Mortgage When in a Debt Management Plan?
If you are in a debt management plan, getting a mortgage is not impossible. But you may need a larger deposit and be prepared for pay a higher rate of interest. A debt management plan (or DMP) can be used to manage a personal debt problem. It is an informal agreement with your creditors to significantly reduce monthly payments to unsecured debts like credit cards.
Although reducing the amount that your creditors are paid each month can be a life saver, this does not come without a cost. One of the effects of a debt management plan is that your credit rating will be damaged.
Credit rating damaged by defaults
If you agree to pay less than the contracted minimum monthly payments to your creditors, they will normally issue a default notice against you. This default will be recorded on your credit file. A default notice will remain on your credit file for 6 years and will warn other potential lenders that their risk of not being paid by you is higher than normal. The fact that default notices are registered against your file will generally prevent you from taking more unsecured credit until your debts are repaid first.
However, it is still possible to get a mortgage.
Moving home or equity release
Because a mortgage is secured against a house, some mortgage companies are more willing to risk lending to people who have a poor credit rating. They will offer what is known as an adverse mortgage. If you already have a property, you may want to move or release equity from your home to pay off your debt. There are adverse mortgage lenders who will consider lending to you. However, you must be prepared for the fact that most of these lenders will not let you borrow more than 75% of the value of the property.
This ceiling on borrowing is designed to protect the mortgage lender against future falls in the price of your house where they are forced to repossess the property if you do not keep up your payments.
First time buyers
If you are in a debt management plan and are looking into buying your first home, again this is possible with an adverse mortgage. However, there are a couple of things to be aware of. Firstly you will need a sizable deposit. In today’s mortgage market, first time buyers will generally need a deposit of 20% of the property’s value. If you are in a DMP and struggling financially, this size of deposit you require could be nearer 30%.
Secondly, you need to plan very carefully for the ongoing cost of living in your own house. When reviewing your budget, there will be new costs which did not exist when you were renting such as building’s insurance, maintenance and repairs. If you are already trying to repay debt, the last thing you should do is take on a mortgage only to find that you can no longer pay your debt management plan because your living expenses have increased.
At the end of the day, it is possible to get a mortgage when you are in a debt management plan. However, the reality of today’s mortgage market is such that this will be difficult especially as house prices and equity has fallen. If you are a first time buyer, again it is possible to take a mortgage if you are in a DMP. However, this would have to be carefully thought out. In general, it may well be advisable to consider resolving your debt problem first before trying to get in to the property market.
Which Mortgage Should I Pay Off First?
Many homeowners have more than one mortgage on their property these days. Second mortgages or home equity loans are popular ways to pay for home improvements, vacations, college tuition, medical bills or just paying off other credit card bills. However, second mortgages are also secured by your home. So if you don’t have a plan on how you are going to pay the mortgage back, you could find yourself in financial trouble and even at risk of losing your home to foreclosure.
Perhaps you find yourself with the pleasant problem of trying to decide what to do with an unexpected windfall of cash. Maybe you received a bonus at work, a sweet early retirement package, an inheritance or trust fund, or you hit the lottery. Whatever the source of your newfound funds, it’s always a smart strategy to use extra money to pay off debts and free yourself up from lingering monthly payments. If you have mortgages, it may be wise to pay them off, or at least pay down some of the principal.
Analyzing the loan terms
Prepayment Penalties
Before you decide which mortgage to pay off first, check both and make sure you don’t have any pre-payment penalties. Usually pre-payment penalties only apply to the first few years of a loan or when you refinance. If either of your loans has a prepayment penalty, then you should pay the one that does not have a penalty off first.
ARM’s or Variable Rate Mortgages
If neither of your loans has a prepayment penalty, then pay off the adjustable rate mortgage first. Adjustable rate Mortgages reset to higher rates. Sometimes the rates are so high that borrowers cannot afford to make their new mortgage payments when the rates reset. This is what happened to many sub-prime borrowers that caused a huge increase of foreclosures on the market the last couple years.
Higher Interest Rate Mortgages
If you have two fixed rate mortgages, then you should pay the one with the higher interest rate off first
Bad Credit Second Mortgages – A Great Option For Those Who Need to Start Cutting Costs Immediately
Many homeowners are feeling the crunch of a down economy. Seeking a home refinance loan is a great path to saving a lot of money however, because this economic down turn may have caused a slip or two many homeowners are now facing a less than sparkling credit score. Bad credit mortgages are available as are refinance loans however, when a comparison is done a second mortgage may be a more cost effective solution than refinancing the first mortgage and should not be ruled out if you are determined to cut your overall cost of living in the upcoming years.
In the past bad credit second mortgages have contributed to a large portion of the market. A rapid increase in organizations that specialize in this type of bad credit mortgage refinance has created competition and in turn rates have decreased substantially.
In your search for the best deal for your second mortgage keep in mind the major aspects of your personal financial state that contribute to determining your eligibility as well as the cost for this type of mortgage.
The Interest Rate
Obviously the interest rate on any bad credit mortgage is going to be a bit higher than the interest rate offered to someone with a higher credit score. Also, the fact that this is a second mortgage will add even more points to the overall cost.
Keep in mind the risk involved. If a second mortgage is defaulted the second mortgage must be settled first and the first must be maintained all the while lest the homeowner face foreclosure.
Employment History
A home owners work history will be scrutinized closely when applying for a second mortgage. Lenders prefer to see that the home owners current job has been held for two years and that they have been in the same line of work for three or more years.
Credit Score
A home owners history of financial obligations will be looked at closely. Their credit report, which shows all credit activity past and present, yields an overall score which will need to be within the range of 650 to 700 for a lender to take them on. If the score is below 650 the homeowner will fall into the bad credit mortgage range and will face increased rates and fees for their second mortgage.
Closing Costs
Closing costs on a second mortgage are definitely lower than the fees associated with refinancing the original mortgage. Processing fees will be added as percentage points on the loan.
Length of Term
Something to consider is the length of your bad credit mortgage. It is a trade off. The longer the term, the lower your monthly payments will be however the amount of interest you pay will be greater over time. The shorter the term settled for, the higher the monthly payments will be but over the course of the loan, interest paid will be less. Your best course of action is to pay as much as you can possibly afford per month in order to save as much as possible in the long term.