A DRO (debt relief order) is a legal process that can help people who are struggling with unmanageable levels of debt. It’s a way to get some breathing room and start to rebuild your finances. But what happens when you want to take out a mortgage after a DRO? Can you still get one? We explore this subject in depth, so you can learn more about where you stand.

What Is a Debt Relief Order?

A debt relief order (DRO) is a court order that can help people with limited assets and income to pay off their debts. The order can be made if you owe up to £20,000, have little or no surplus income, own less than £1,000 in assets and don’t own your home. Once the order is made, your creditors are legally prevented from taking any further action against you. This means that you won’t have to make any payments towards certain debts for a specified period of time, called a "moratorium" (usually 12 months). After this time, any remaining debt will be written off. Debt relief orders are a relatively new process, but they have already helped many people to get out of debt. For people who are struggling to repay their debts, a debt relief order – as indicated by the name - can certainly provide much-needed relief.

Debt relief orders are considered a "lite" version of bankruptcy, as they're much cheaper and easier to qualify for. However, they also have a significant impact on your credit rating, which can make it more difficult to obtain credit in the future.

Can You Get a Mortgage After a Debt Relief Order?

Many people who have been through a debt relief order want to start rebuilding their finances and their credit rating. As people who qualify for a DRO don't own their home, it's normally a goal to get on the property ladder once their financial situation has been sorted out.

Getting a mortgage after a debt relief order is possible but it can be difficult, depending on how long it’s been since you were discharged from the DRO. Additionally, your credit rating will have been affected by the DRO, which could make it even harder to get a mortgage.

That's why it's important to go through an independent, specialist mortgage broker - such as John Charcol - who has access to the whole market. We can match you with the right lender for your situation.

What Criteria Do You Need to Meet to Get a Mortgage After a DRO?

Each application will be considered on its own merits, taking into account several considerations. We break this down below.

How Long It Has Been Since the Debt Relief Order Was Made

Most high street lenders will want to see at least 3 - 6 years' worth of good financial management since the DRO was satisfied before they'll consider you for a mortgage. However, other lenders – including some high street, building societies and adverse credit lenders -  may be willing to consider your application 1 – 3 years since the DRO was satisfied. Finally, there is one lender that will consider an applicant who has had a DRO satisfied within the last year.

Essentially, the longer it has been since your debt relief order, the easier it will be to get a good deal on your mortgage. This is because it will show lenders that you have managed your finances well during this time and are now in a better position to afford a mortgage. When you reach 6 years, you’ll usually have much more choice when it comes to lenders, as your DRO will have been removed from your credit file. This means it shouldn’t affect your mortgage application at all.

The Reasons for the DRO

The lender will also want to know the circumstances that led to you getting a debt relief order. For example, if you lost your job and couldn't keep up with your repayments, they may be more sympathetic than if you ran up a lot of debt through impulse buying. They'll want to see that it was a one-off event and that you're now in a better position to manage your finances. If you can demonstrate this, you'll be much more likely to secure a mortgage.

Your Deposit

Having a larger deposit will make it easier to get a mortgage after a DRO. This is because it a larger deposit lowers the LTV (loan-to-value) and reduces the risk taken on by the lender. The longer it's been since you've been discharged from your DRO, the lower deposit you’ll likely need. For example, if it's only been 3 years since your discharge date, the lender may require a 20% - 25% deposit. Whereas if it's been 6 years, you may be able to get a more competitive deal at 90 - 95% LTV. So, it's important to start saving up as soon as possible if you're hoping to get a mortgage after your DRO.

Your Income and Outgoings

When you apply for a mortgage – whether you’ve had a DRO or not - lenders will want to see that you can afford the repayments and interest charges. They’ll therefore assess your income and outgoings to see how much you can afford. It's important to be honest when declaring your income and outgoings, as any discrepancies could lead to your application being declined.

Lenders typically like to see that your mortgage repayments will be no more than 30% of your monthly income.

Your Credit Rating

As mentioned above, your credit score is affected by the debt relief order. This is because the debt relief order will appear on your credit file for 6 years and will lower your credit rating. Additionally, any late or missed payments that led to the debt relief order will also appear on your credit file and will likely contribute to an even lower credit score.

Having a low credit score will make it harder to get a mortgage after a DRO. This is because lenders will view you as a high risk borrower and so they may be reluctant to approve your application.

If you're hoping to get a mortgage after a DRO, it's important to start rebuilding your credit rating as soon as possible. You can do this by ensuring that you make all of your payments on time and by keeping your credit card balances low. Also register on the electoral roll, as this can be an easy way to boost your credit score.

Your Choice of Mortgage

The type of mortgage you choose will also affect your chances of getting approved for a mortgage after a DRO. For example, it's easier to get approved for standard mortgage products like purchases or remortgages. Conversely, products like shared ownership, self-build and new-build mortgages are harder to get approved for generally, let alone with bad credit events on your file like a DRO.

How Will a DRO Affect My Mortgage?

A debt relief order can have a significant impact on the lenders and products available to you and you may find it difficult to obtain a mortgage at all if you're applying soon after your DRO.

If you receive a mortgage offer from an adverse credit lender, you may find that it has:

  • A higher interest rate: this is because lenders will view you as a high risk borrower and charge you a higher rate to compensate for this risk

A higher deposit requirement: you may need to put down a larger deposit if you have a debt relief order on your credit file in order to reduce the lender's risk. This can be up to 25%

Will Bad Credit Affect Me Getting a Mortgage After a DRO?

If you've had a debt relief order, that means you probably havebad credit. The type, intensity and date of your credit problems will all be factors in deciding which lenders are approachable and if getting a good mortgage deal is likely.

Having the following kinds of credit issues can further impact your credit score:

It’s best to use a mortgage broker like John Charcol when applying for a mortgage post DRO because of the many potential credit issues. We can match you with the right lender with the best deals for your situation.

What if I've Had More Credit Issues After a DRO?

If you have a DRO, it's likely that you’ll have experience with other credit problems or bad credit events. After all, rebuilding your finances following a debt relief order can be difficult and it's possible to fall into debt again. If these additional credit issues pile up, it can make it more complicated to be approved for a mortgage. In this case, trying to go through a regular high-street lender may not work out.

Adverse credit and subprime lenders tend to be more likely to consider DRO applicants with other credit issues. This is because they learn about the circumstances that led to the bad credit event(s) and take this into account when assessing your application.

If you require one of these specialist lenders then you’ll likely need a mortgage broker like John Charcol as many of these lenders only operate via intermediaries; they don’t deal directly with the borrower.

What if I've Had a Restriction Placed on My DRO?

A DRRO, or debt relief restriction order, is a punishment for not following the terms of your debt relief order. This could involve restricted borrowing in the future. Official receivers place a restriction on lending to individuals in order to keep their credit from spiralling out of control.

If you have a DRRO, you'll need to speak with a specialist broker such as John Charcol. The length and conditions of the restriction will differ for each person. After an adviser understands your DRRO's provisions, they'll be able to give you advice on your mortgage options.

Can I Apply for a Mortgage Before a DRO?

If you're having trouble with your present level of credit and are seeking to apply for a DRO, it's unlikely that you'll be able to get a mortgage or that we would advise you to do so. However, if you do obtain a mortgage, you’ll no longer be eligible for a debt relief order, and you will be required to pay both the mortgage and any outstanding debts as normal.

Can I Apply for a Mortgage During the Moratorium?

No, it's illegal for lenders to grant you a mortgage during the moratorium period. This is because you aren't allowed to take on any additional debt during this time. So, no matter how lenient some types of lenders may be, they will not grant you a mortgage while your DRO is still active.

What if I've Just Been Discharged from My DRO?

If you've been discharged from your DRO, that means that it's no longer active and you're no longer bound by its terms. This gives you a fresh start, but it doesn't mean that your credit history will be wiped clean. There is only one lender currently on the market that will consider applicants who have been discharged from their DRO within the last 12 months. More lenders, including some high street ones, building societies and adverse credit lenders, will consider you if you’ve been discharged from your DRO for at least 1 – 3 years.

So, if it's been under a year since you were discharged, it's probably best to try and wait a little longer before applying for a mortgage so you can secure a better deal.

Can an Independent, Specialist Mortgage Broker Really Help?

An independent, specialist mortgage broker like John Charcol can help you to get on the property ladder, even if you’ve had a DRO or other credit issues. We understand that people's circumstances can change and that life doesn't always go according to plan. We’ll use our expertise to assess your situation and point you in the right direction.

Contact us today on 0330 433 2927 to learn more about your mortgage options.

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