If you’ve ever contacted StepChange or a debt relief company, they will likely have advised you to come to an agreement with your creditors to reduce payments and pay down existing debt.
This agreement is known as an Individual Voluntary Agreement or IVA.
In some cases, an IVA won’t be suitable and there will be other ways of managing your debt.
In some cases where liabilities far outweigh assets and income you might need to file for bankruptcy.
IVAs have become increasingly common over the last two decades and many people who have them wonder whether they can still get a mortgage.
Getting a mortgage with an IVA can be tricky, but it is possible.
This guide outlines everything you need to know about getting a mortgage with an IVA and how to improve your chances of success.
Let’s explore this complex subject further.
What is an IVA?
An IVA is a formal agreement drawn up (normally by a third party) between you and your creditors.
It is used to manage debts and liabilities that have become unmanageable.
For example, if you fall behind on payments or receive defaults and County Court Judgements (CCJs).
By entering into an IVA, you’re showing your creditor you want to clear the debt (or as much as possible) and you are not ignoring it.
Debt problems without any agreed plan with a creditor will cause further action to be taken against you which can result in CCJs, and bailiffs being appointed to collect the money.
By entering into an IVA, you stop the debt recovery process from escalating further and have a fixed monthly payment to make toward your debt.
An IVA may not incorporate ALL debt and you might find debts like Council Tax not included within your IVA.
Overall, an IVA is an agreement to help you make a manageable payment each month to your creditors and prevent further debt recovery action.
An IVA will impact your credit score and it can have long-lasting effects on your ability to obtain credit including mortgages.
Can I Get a Mortgage with an IVA?
The answer here is technically yes, you can get a mortgage with an IVA in place. It is a rare occurrence though and you will need to use a specialist lender that accepts adverse-risk customers.
Even then, the lenders that look at applicants with IVAs will heavily scrutinise your personal financial situation.
An IVA is a red flag that a lender will be troubled by.
IVAs are entered into because at a point in your life, you couldn’t afford to repay your debt and lenders will want to know how you can now afford a mortgage as well as the existing IVA.
The amount of time you’ve had an IVA will also be a factor.
In the same way as bankruptcy, the longer the time period since making the agreement the better your chances.
If you have taken an IVA in the last month, a lender will be under no illusion that your financial situation has changed so drastically that you can now afford to pay a mortgage and your existing IVA.
An IVA that has been in place for 5 years by comparison would be treated better as lenders may believe your financial situation has changed enough to consider a mortgage.
Overall, if you’re still in an IVA the chances of getting a mortgage are remote.
Once the IVA is settled, your chances do improve again depending on your personal situation.
Deposits and IVAs
One of the biggest hurdles to getting a mortgage with an IVA is the deposit.
Not only will you need to save a significant amount of money alongside paying your IVA, but your IVA agreement will outline any spare money you have (deposit) required to be paid to the IVA.
Sometimes people rely on gifted deposits in an attempt to circumvent the IVA, but this won’t work either as IVAs have what’s known as a windfall clause.
It means any amount of money you receive from a third party is owed to existing creditors and can’t be used as a deposit.
The only sensible solution is to clear and settle the IVA as soon as possible and then look at getting a mortgage.
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Can I Remortgage with an IVA?
It is possible to remortgage with an IVA, in the same way it is technically possible to get a mortgage with an IVA.
The chances of remortgaging with an IVA in place are slim.
The chances of remortgaging are further complicated if you have had problems paying your existing mortgage.
Once again, the best option is to clear the IVA and have it settled before looking to remortgage.
How Long Does an IVA Stay on my Credit File?
Contrary to popular belief, an IVA can stay on your credit file for a significant amount of time.
Most resources online simply state once six years have passed (which is the statute of limitations in the UK) the debt will no longer be on your file.
This isn’t exactly true for the following reasons:
- The time from taking the IVA will be reflected on your credit record. Most IVAs run for a number of years (normally up to six years).
- IVAs can in rare cases be arranged to run longer than 6 years.
- Only once the IVA is settled will the 6-year period for it to disappear from your credit file start.
- If there are any CCJs involved that aren’t settled by the IVA there is no statute of limitation on CCJs. Every 6 years a creditor can apply to renew the CCJ.
In this respect, from the initial point of getting an IVA to the point it is no longer reflected on your credit record can be many years more than the oft-cited 6-year period.
In most cases an IVA will be on your credit profile for much more than 6 years.
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What Happens After My IVA Settles?
After your IVA settles, the 6-year period begins. After 6 years, the settled IVA will drop off your credit file.
If you have CCJs that are included in the IVA, these will be included in this 6-year period.
This is because an IVA is legally binding and supersedes the initial court ruling.
If you have an IVA where creditors with CCJs refused to accept the IVA, these can stay on your record indefinitely.
A creditor with a CCJ that has exceeded the initial 6-year period will need to reapply for the CCJ to be enforceable.
Do I Have to Wait for my IVA to Settle Before Getting a Mortgage?
Ideally yes. As discussed, it is possible to get a mortgage with an IVA in place, but these are rare.
Once settled, the mortgage lender will not need to worry about legal clauses in the IVA when assessing your mortgage application.
Legal clauses in an IVA normally prohibit a mortgage lender from being able to agree a mortgage.
For example, the windfall clause in an IVA will almost always mean the money you intend for a deposit will be given to your creditors.
When your IVA is settled a lender will be able to look at your financial situation from a more neutral standpoint.
This means even if the IVA is still showing on your credit record, a mortgage lender will know you have honoured your financial obligations under the IVA, and this will improve your risk profile.
How Can I Increase My Mortgage Chances After an IVA?
There are a number of ways to improve your chances of getting a mortgage after having an IVA.
Your chances will be improved in different ways depending on where you are in the IVA process.
For example, if you have recently entered an IVA agreement, any positive changes you make will have little to no impact on your mortgage chances because enough time hasn’t elapsed.
Your first priority to improve your mortgage chances with an IVA is to continue to meet your IVA obligations on time and in full.
If you find during the period, you have the IVA that you have additional money to contribute to the IVA it is best to make overpayments or even settle it in full.
Doing so allows the IVA to drop from your credit record sooner.
Once you have settled the IVA, you will need to actively manage any other debts and liabilities and work on your overall credit score.
Having an IVA on your record will have negatively impacted your overall score.
Your score will need repairing from that point on, even if the IVA has been settled.
Credit Score Management
Mortgage lenders use credit reference agencies to understand your overall creditworthiness.
Credit reference agencies provide both detailed financial history and your credit score to a lender.
Settling an IVA should in most cases slightly improve your credit score, but it likely will not return to the level it was before you incurred the debt.
This is because an IVA represents a significant failing to manage debt responsibly and your credit score – a score that reflects your financial responsibility.
With that said, there are other areas you can work on to improve or even restore you credit score.
Pay off any other debt that isn’t subject to the IVA including CCJs.
These debts do not always need to be paid in full and you can approach lenders with settlement offers.
Settling a debt does not help your score as much as paying it in full, but it will help a little.
This can be useful if you are not in the position to clear debt in full and want to improve your credit score.
Clear your overdrafts and credit cards.
Overdraft usage can be problematic with a mortgage, and regular usage will eat into your credit profile.
Credit cards likewise can hamper a mortgage application.
Always look at the interest rates on your cards and look to see if there are 0% cards available that you can arrange a balance transfer to this reduces the interest you pay on the debt and allows you to clear capital with a lower (or no interest rate).
Avoid further financial commitments where possible.
The more you extend yourself financially, the greater the risk your debt can become unmanageable again.
Try to limit any further borrowing.
Register to vote on the electoral register.
Some people with IVAs or credit problems avoid being registered to vote as it makes it more difficult for creditors to track you down, by registering to vote your score will improve as you present less risk to creditors.
Talk to a Mortgage Broker
IVA mortgages are complicated and require a level of know-how and access to a broad range of lenders.
Discussing your financial situation and IVA with a mortgage broker will help you understand what products are available to you and your best course of action going forward.
If you’re not yet in an IVA, you should discuss with the company arranging the IVA your intention to get a mortgage.
This is because there may be other financial solutions that are better than an IVA and help you get a mortgage sooner.
For example, it might be better to approach creditors on an informal basis and make agreements yourself with each creditor.
Most creditors will go through what’s known as a statement of means which will look at your overall financial situation and how much you can afford to pay.
If the creditor feels you have adequate funds to make partial payments on an informal basis, this may be beneficial compared to obtaining a legally binding agreement like an IVA.
Boon Brokers is a whole of market mortgage, insurance and equity release broker.
Boon brokers has access to a panel of lenders that accept adverse credit mortgages including some who will consider bankruptcy.
To discuss your debt or financial situation in relation to a mortgage, contact Boon Brokers today.