Mortgage after a debt relief order

Having a Debt Relief Order (DRO) in your financial history might seem like a hurdle when considering a mortgage. However, while it’s a challenge, it’s not an insurmountable one. This guide provides an in-depth look at mortgages after a DRO, offering insight and advice to help navigate your journey to homeownership.

What is a debt relief order (DRO)?

A Debt Relief Order (DRO) is a legal form of debt relief in the United Kingdom. It’s an option for people with low income, few assets, and relatively low levels of debt. A DRO is a way to have your debts written off if you owe £30,000 or less, you have less than £75 a month in spare income, and you have less than £2,000 worth of assets.

A DRO is designed for individuals who can’t afford to pay their debts, and it provides a cheaper alternative to bankruptcy. It’s granted by the Insolvency Service, but you must apply through an authorized debt advisor.

Once a DRO is approved, you are usually exempt from repaying the debts listed in the order for a period of 12 months. During this time, your creditors can’t take any action to reclaim the money without permission from the courts. If your financial situation hasn’t improved by the end of this period, the debts included in the DRO will be written off.

However, a DRO is a serious debt solution with long-lasting implications. It will have a severe impact on your credit rating for six years and can limit your financial opportunities, which can make it harder to get credit or certain types of jobs in the future. It can also affect your ability to get a mortgage, which is why potential home buyers need to understand the implications and potential strategies for securing a mortgage after a DRO.

Can I get a mortgage after a debt relief order? 

Yes, it is possible to get a mortgage after a debt relief order (DRO), but it can be more difficult and may take some time.

After a DRO is discharged, it will remain on your credit report for six years. During this period, lenders will be able to see that you’ve had a DRO when they check your credit report. This could make them more cautious about lending to you, as they may see you as a higher risk borrower.
However, not all mortgage lenders view DROs in the same way, and some may be willing to consider your application, particularly if you can demonstrate that you’re able to manage your finances well now.

Here are some strategies to improve your chances of getting a mortgage after a DRO:

1. Improve Your Credit Score: The first step is to start rebuilding your credit score. You can do this by using credit responsibly, such as by using a credit card for small purchases and paying the balance in full each month, or by taking out a small loan and making the repayments on time.

2. Save for a Larger Deposit: Saving a larger deposit can help to offset the risk perceived by the lenders. The larger your deposit, the less you need to borrow, and the more likely a lender is to see you as a lower risk.

3. Wait Until the DRO is Removed from Your Credit Report: If possible, it may be beneficial to wait until the DRO has been removed from your credit report after six years before applying for a mortgage.

5. Have a Stable Income and Employment History: If you can demonstrate a stable income and employment history, this could also increase your chances of being approved for a mortgage.
Please remember that it’s always a good idea to seek advice from a financial advisor or a debt counsellor before making any significant financial decisions.

Why are the dates around a debt relief order so critical?

The dates around a debt relief order (DRO) are critical due to the way they impact various timelines for credit and debt management. There are three key dates associated with a DRO that are particularly important:

1. The Order Date: This is the date when the Insolvency Service grants the DRO. From this point, you are protected from your creditors taking action to recover the debts included in the DRO for a period of one year, known as the “moratorium period”.

2. The End of the Moratorium Period: This is a year after the order date. At this point, if your financial circumstances have not improved, the debts listed in the DRO are usually written off.

3. The Six-Year Mark: A DRO stays on your credit report for six years from the order date. This can make it harder for you to get credit during this period, including a mortgage. Once the six years have passed and the DRO is removed from your credit report, it might be easier for you to get credit, although some lenders may still ask if you’ve ever been subject to a DRO.

Understanding these dates is crucial, because they can impact your ability to manage your debts, get new credit, and plan for your financial future. They can also influence the strategies you might use to improve your financial health after a DRO, such as when you might start trying to rebuild your credit.

Are there mortgage lenders that specialise in lending to individuals with a past debt relief order?

Yes, there are some mortgage lenders who specialise in providing mortgages to people with adverse credit history, including those who have had a debt relief order (DRO) in the past. These lenders are often referred to as “subprime” lenders or “non-conventional” lenders. They’re willing to consider circumstances that many mainstream lenders might reject.

However, it’s important to note that getting a mortgage from these lenders often comes at a price. They usually charge higher interest rates and fees to offset the additional risk they’re taking on by lending to someone with a history of financial difficulties. The loan-to-value ratios (LTV) are also often lower, meaning you may need a larger deposit.

Each lender will have their own criteria for who they will lend to and on what terms. Some may require a certain period to have passed since the DRO was discharged. Others may need to see evidence of improved financial management since the DRO.

Given the complexities, it can be beneficial to work with a mortgage broker who has experience with adverse credit situations. They can help you understand your options and find lenders who are most likely to approve your application.

Keep in mind that just because a mortgage is available doesn’t mean it’s the best choice for your financial situation. It’s crucial to carefully consider the costs and your ability to manage the repayments over the long term. You may also wish to consider other options for improving your credit before applying for a mortgage.

Lending criteria 

When you apply for a loan, lenders will use specific criteria to evaluate your application and decide whether to lend to you. The exact criteria can vary from lender to lender and for different types of loans, but typically, the main criteria include:

1. Credit Score: This is a numerical representation of your creditworthiness based on your credit history. It’s calculated using information from your credit report, such as your payment history, the amount of debt you have, and the length of your credit history.

2. Income: Lenders will want to see proof of regular income to ensure that you can afford the loan repayments. This can come from employment, self-employment, or other sources such as pensions or benefits.

3. Employment Status: Some lenders may require you to be in stable employment or to have been self-employed for a certain period.

4. Debt-to-Income Ratio: This is the percentage of your income that goes towards paying your existing debts. Lenders usually prefer this to be below a certain threshold, often around 30–40%.

5. Loan to Value (LTV) Ratio: In the case of mortgages, this is the percentage of the property’s value that you’re looking to borrow. A lower LTV usually means lower risk for the lender.

6. Residential Status: Some loans, like mortgages, require you to be a resident of the country where you’re applying for the loan.

7. Age: In the UK, you generally need to be over 18 to apply for a loan. Some lenders also have an upper age limit.

8. Previous Financial Difficulties: If you’ve had financial problems in the past, such as missed payments, defaults, or insolvency proceedings like a Debt Relief Order (DRO), this can affect your ability to get a loan. Some lenders specialise in lending to people with adverse credit histories, but usually at higher interest rates.

It’s important to remember that each lender will have their own lending criteria, and these are just general guidelines. If you’re uncertain about whether you’d qualify for a loan, it can be worth discussing your situation with a financial advisor or the lender directly.

What types of mortgages are available to individuals who have had a debt relief order?

There are lenders who specialise in providing mortgages to those with a past DRO or adverse credit history, often referred to as “subprime” lenders or “non-conventional” lenders. The types of mortgages available can include:

1. Standard Variable Rate Mortgages: The interest rates on these mortgages vary at the discretion of the lender, often loosely following the Bank of England’s base rate.

2. Fixed-Rate Mortgages: These mortgages allow you to fix your interest rate for a certain period (usually 2, 3, 5, or 10 years). This can give you peace of mind as your monthly repayments will stay the same during the fixed-rate period, but the initial rates can be higher for individuals with past DROs.

3. Tracker Mortgages: These mortgages track the Bank of England’s base rate at a set margin above or below it. However, these may be less commonly offered to those with a DRO due to the potential variability in repayments.

4. Discount Mortgages: These mortgages offer a discount off the lender’s standard variable rate (SVR) for a set period. Again, these may be less commonly offered to those with a DRO.

5. Bad Credit Mortgages: These are specifically designed for individuals with adverse credit histories. These typically come with higher interest rates and may require a larger deposit.

Remember, the terms of your mortgage, including the interest rate and the required deposit, will depend on several factors, including how long ago your DRO was and how you’ve managed your finances since. If you’re considering getting a mortgage after a DRO, it could be beneficial to consult with a mortgage broker experienced in dealing with adverse credit situations. They can help you understand your options and identify potential lenders.

What mortgage interest rates can I expect after having a debt relief order?

Interest rates for mortgages can vary widely depending on several factors, including the lender, the type of mortgage, the size of the deposit you can put down, and, most importantly, your credit history.

After a Debt Relief Order (DRO), you’re likely to face higher interest rates because you’ll be viewed as a higher risk by lenders. Your credit history will show the DRO for six years after the order was put in place.

Typically, “high street” or conventional lenders might offer competitive interest rates for borrowers with good credit histories. However, for those with adverse credit events like a DRO, they may decline the application or offer much higher rates if they do accept.

There are specialist lenders who provide “bad credit mortgages” or “adverse credit mortgages” for those who’ve had past financial difficulties. These lenders are used to dealing with higher-risk borrowers and are often more willing to offer mortgages to people with a DRO or other adverse credit events. However, the interest rates offered by these lenders tend to be higher, reflecting the increased risk they’re taking.

Unfortunately, it’s hard to give an exact figure or range for the interest rates you can expect after a DRO, as it will depend on your specific circumstances and the lender’s criteria.

To get a clearer idea of the rates you might be offered, you could consider getting advice from a mortgage broker who specialises in bad credit mortgages. They can help you understand your options and potentially identify lenders who are willing to lend to you. Please remember, it’s important to consider whether you can afford the higher repayments that come with a higher interest rate before committing to such a mortgage.

How much deposit will I need for a mortgage after a debt relief order?

The size of the deposit you’ll need for a mortgage after a debt relief order (DRO) can vary widely depending on your specific circumstances and the lender’s criteria.

When dealing with applicants who have a history of financial difficulties, a larger deposit can generally help offset the risk that lenders perceive. While it’s common for many mortgages to require a deposit of around 5-10% of the property’s value, if you’ve had a DRO, you might be asked for a larger deposit, potentially 15–25% or more, depending on the lender and your personal situation.

Specialist or “subprime” lenders, who are more used to dealing with higher-risk borrowers, may accept a lower deposit than this, but they will likely charge higher interest rates to offset the increased risk.

It’s also worth noting that the timing since the DRO was discharged can affect the deposit required. The longer the time since the DRO, the lower the deposit you may be required to provide, especially if you’ve been able to demonstrate good financial behaviour during that period.

How soon after my DRO can I apply for a mortgage?

After you’ve had a debt relief order (DRO), you can technically apply for a mortgage at any time. However, the DRO will remain on your credit report for six years from the date it was put in place. During this period, it may be more challenging to get a mortgage, and if you do, it could come with less favourable terms such as a higher interest rate or the need for a larger deposit.

Most mortgage lenders will want to see a period of financial stability after a DRO before considering lending to you. This allows you to demonstrate that you’ve managed your finances well since the DRO and that you’re less of a risk.

The exact length of this period can vary depending on the lender, but it’s common for lenders to require at least one to three years after a DRO is discharged before they’ll consider a mortgage application. Some lenders might require even more time to pass, particularly for applicants with multiple adverse credit events.

Please remember, it’s always a good idea to seek advice from a financial advisor or a debt counsellor before making any significant financial decisions, such as applying for a mortgage. They can help you understand your options and what you can do to improve your chances of being approved.

How a broker can help you get approved 

A mortgage broker can be extremely valuable, especially if you’re applying for a mortgage after a debt relief order (DRO). Here are several ways a broker can help:

1. Expert Knowledge: Brokers have extensive knowledge about the mortgage market, including lenders who specialise in providing mortgages to those with adverse credit history. They can help you understand your options and advise you on which lenders may be more likely to accept your application.

2. Understanding Lending Criteria: Every lender has different lending criteria. Brokers are familiar with these criteria and can help you find lenders who are most likely to approve you based on your individual circumstances, thereby reducing the risk of rejected applications that can negatively impact your credit score.

3. Tailoring Your Application: Brokers can help you prepare your application and make sure it presents your financial situation in the best possible light. They know what information lenders look for and can guide you on how to provide it.

4. Saving Time and Effort: Searching for a mortgage can be time-consuming, particularly when you have a complex situation like having a past DRO. A broker can do the legwork for you, saving you time and effort.

5. Negotiation: A broker may be able to negotiate more favourable terms on your behalf, such as a lower interest rate or a higher loan amount.

6. Ongoing Support: A broker can provide support throughout the mortgage process, helping you understand everything from the fees involved to the terms of the mortgage agreement.

7. Access to Exclusive Deals: Some mortgage deals are only available through brokers, so working with one could give you access to a wider range of options.

How much can I borrow if I’ve had a DRO?

The amount you can borrow for a mortgage after a debt relief order (DRO) depends on several factors, including:

1. Your Income: Lenders usually calculate how much you can borrow based on your income. This is often done using a multiple of your income, typically around 4–4.5 times. For joint applications, it’s usually based on the combined income of the applicants.

2. Debt-to-Income Ratio: This is the proportion of your income that goes towards debt repayments. If you have high existing debt repayments, it could limit the amount you can borrow.

3. Credit History: If you’ve had a DRO, lenders may be more cautious about how much they’re willing to lend, even if the DRO has been discharged.

4. Affordability Checks: Lenders will look at your income and outgoings to ensure you can afford the mortgage repayments both now and in the future if interest rates rise.

5. The Deposit: The size of your deposit can also affect how much you can borrow. The bigger the deposit, the smaller the loan you’ll need.

6. Lender’s Criteria: Different lenders have different criteria. Some may be willing to lend larger amounts, particularly specialist or subprime lenders who are used to dealing with higher-risk borrowers.

What if I’ve had a restriction placed on my DRO?

A restriction on a debt relief order (DRO), also known as a debt relief restrictions order (DRRO), can make it even more challenging to get a mortgage. A DRRO can be placed on you if the official receiver decides that you have been dishonest, or if you haven’t cooperated with them during your DRO. It can extend the restrictions of the DRO for 2 to 15 years.

During the period of a DRRO, you’re still subject to the restrictions of a DRO, such as not being able to borrow more than £500 without informing the lender of your situation. This would typically rule out getting a mortgage. Furthermore, the DRRO will appear on your credit report, making it more difficult to obtain credit even after the DRRO has ended.

If you have a DRRO, it’s crucial to abide by the restrictions and obligations it imposes. Once the DRRO has ended, you can start rebuilding your credit history, although you should be aware that it may take some time before lenders are willing to lend to you, particularly for a large loan like a mortgage.

Again, working with a mortgage broker experienced in adverse credit situations may be beneficial. They can provide advice tailored to your specific circumstances and guide you on when and how to approach lenders for a mortgage after a DRRO. Please remember that it’s crucial to seek professional advice if you’re unsure about your options.

Will bad credit affect my ability to get a mortgage after a DRO?

Yes, having bad credit can definitely affect your ability to get a mortgage after a debt relief order (DRO). Here’s how:

1. Higher Interest Rates: If you have bad credit, lenders will see you as a higher risk, and they’re likely to charge you higher interest rates to offset that risk.

2. Bigger Deposit: You might be required to put down a larger deposit. Lenders do this to protect themselves if you default on the mortgage. The more money you put down, the less they stand to lose.

3. Limited Lenders: Many lenders may be unwilling to lend to you if you have bad credit. This can limit your options and make it harder to find a mortgage that suits your needs. However, there are some specialist or subprime lenders who may be willing to consider your application.

4. Smaller Loan: The amount you’re allowed to borrow may be less than someone with a good credit score. This is because lenders will be more cautious about lending large amounts to people with a history of debt problems.

5. Application Rejections: Bad credit increases the likelihood of mortgage application rejections. It’s important to note that too many credit applications in a short time frame can further lower your credit score.

The impact of bad credit can lessen over time, particularly if you take steps to improve your credit score. This can involve paying all your bills on time, not using too much of your available credit, and not applying for new credit unless necessary.

If you’re considering applying for a mortgage after a DRO, and you have bad credit, you might want to consult with a financial advisor or a mortgage broker who specialises in adverse credit situations. They can provide you with advice tailored to your circumstances and help you navigate the mortgage application process.

Remortgaging after a debt relief order

Remortgaging after a debt relief order (DRO) can be challenging, but it’s not impossible. A remortgage involves paying off your existing mortgage and moving to a new deal, either with your existing lender or a new one. There are several key things to consider when trying to remortgage after a DRO:

Timing: The DRO will remain on your credit report for six years from the date it was put in place. During this time, and especially in the first few years after a DRO, it can be harder to find a lender who will approve a remortgage. The longer the time since the DRO, the more likely you are to be approved.

Credit History: Lenders will look at your credit history when deciding whether to approve a remortgage. If you’ve managed your finances well since the DRO and rebuilt your credit, you may have a better chance of being approved.

Equity: The amount of equity you have in your home can also play a big role. If you have a significant amount of equity, lenders may be more willing to approve a remortgage, even if you’ve had a DRO in the past.

Income and Affordability: Lenders will look at your income and your outgoings to make sure you can afford the new mortgage repayments. The more income you have relative to your expenses, the better your chances of being approved.

Interest Rates and Terms: If you’re able to remortgage after a DRO, be aware that the interest rates and terms may not be as favourable as those available to borrowers with a clean credit history. You may face higher interest rates and need to borrow less than you originally planned.

If you’re considering remortgaging after a DRO, it could be beneficial to speak with a mortgage broker who specialises in adverse credit situations. They can help you understand your options and identify potential lenders who may be willing to lend to you. As always, it’s important to carefully consider your own financial situation and what you can afford before deciding to remortgage.

How long does a debt relief order stay on my credit report and affect my ability to secure a mortgage?

A debt relief order (DRO) stays on your credit report for six years from the date it was put in place. This means that any lenders you apply to for a mortgage (or any other type of credit) during this period will be able to see the DRO. This can significantly affect your ability to secure a mortgage, as it indicates to lenders that you’ve had serious financial difficulties in the past.

Potential lenders might still inquire about past insolvencies even after the DRO is no longer visible on your credit report. You should always be honest in your responses, as providing false information could be considered fraud.

During the six-year period that the DRO is on your credit report, you may find it more difficult to get a mortgage, especially from mainstream lenders. If you do manage to find a lender willing to offer you a mortgage, it’s likely that the terms will be less favourable, with higher interest rates and the requirement for a larger deposit.

The impact of the DRO will diminish over time, especially if you take steps to rebuild your credit. This might include meeting all of your credit commitments on time, not applying for too much new credit, and checking your credit report regularly to ensure it’s accurate.

What steps can I take to improve my mortgage eligibility post-Debt Relief Order?

Improving your mortgage eligibility following a Debt Relief Order (DRO) takes time and careful financial management. Here are some steps you can take to improve your situation:

1. Rebuild Your Credit: After a DRO, you’ll need to rebuild your credit score. You can do this by making all payments on time, not using too much of your available credit, and avoiding applying for too much new credit. Credit-building credit cards can be a useful tool for this, but be careful to use them responsibly and pay off the balance in full each month to avoid high interest charges.

2. Save for a Larger Deposit: The larger the deposit you can offer, the lower the risk to the lender. This can make them more willing to offer a mortgage, even if you have a history of DRO.

3. Stable Employment and Income: A steady job and income can show lenders that you have the financial stability to manage mortgage repayments.

4. Reduce Debt: Minimise your existing debt as much as possible before applying for a mortgage. High levels of debt can make lenders cautious about your ability to manage further repayments.

5. Avoid Further Adverse Credit Events: It’s important to avoid any further negative marks on your credit report, such as late payments or defaults. These can further damage your credit score and your chances of being approved for a mortgage.

6. Be Patient: Time is your ally. The further away you get from the date of your DRO, the less impact it will have on your ability to get a mortgage.

7. Seek Professional Advice: Consider speaking to a mortgage broker who specialises in adverse credit situations. They can provide tailored advice based on your circumstances and guide you through the mortgage process.

Remember, rebuilding credit and regaining financial stability is a marathon, not a sprint. It takes time and consistency, so don’t be disheartened if progress feels slow. Every step you take in the right direction improves your chances of securing a mortgage in the future.