What is a Mortgage In Principle?
A Mortgage in Principle, also referred to as an Agreement in Principle (AIP) or a Decision in Principle (DIP) is a written estimate from the lender, giving you an indication of what you could borrow.
Nowadays, most mortgage lenders in the UK operate with an AIP/DIP before a mortgage offer: if you’re using a good mortgage broker, one who’s authorised and regulated by the Financial Conduct Authority, they’re highly likely to want to secure an AIP for you before applying for a full mortgage on your behalf.
An Agreement in Principle (AIP) or Decision in Principle (DIP) will be based on your personal and financial information, and your credit report will be searched before you receive any confirmation. Your mortgage broker will seek to obtain an AIP early on in the house buying process so you know how much money you can spend on a house.
Before you start your property search, it is really helpful to have a clear idea of how big a mortgage you’ll be able to get, which is where the AIP comes in. Getting a mortgage in principle should give you a good indication of how much you might be able to borrow, which in turn will guide you in your house-hunting search.
Remember, when you’re applying for a mortgage it will impact your credit rating, sometimes, even when you obtain an agreement or decision in principle. Be wary of making multiple applications for this reason.
When a mortgage lender gives you an agreement in principle, they are basically saying how much ‘in principle’ they might be prepared to lend you, providing your circumstances don’t change before the full application and you still meet their lending and property criteria. An agreement like this is likely to have to be obtained by anybody seeking a mortgage in the UK, from first-time buyers to experienced homeowners.
This can help you look for properties in your price range and provides sellers with the confidence that you are ready to buy. To offer you even a mortgage in principle, lenders will still need most of the basic details about you that you would need to provide for a full mortgage application, such as your income and how much you want to borrow. They will then usually contact a credit reference agency to conduct a credit search on you before an AIP is offered to you. Some lenders will leave a ‘soft’ footprint on your credit file whereas others will leave a ‘hard’ one. Your mortgage broker will ensure that the correct lender is being applied to.
Remember though, that a mortgage in principle is not a guarantee that you will definitely be offered a mortgage. A lender may change their decision, or offer you slightly different terms once they have received your full application and all your information, and after they’ve carried out their formal underwriting checks. This is why it’s so important to have a mortgage broker to advise you on the lender to apply to, ensuring you’re the right fit for their criteria.
How long does a mortgage in principle last?
A mortgage in principle will typically last between 30 and 90 days. If it expires before you need it and you run out of time to apply for your full mortgage, you can always reapply for a new AIP. If it’s with the same lender, your credit shouldn’t be affected, but do be careful about applying for too many agreements in principle with a variety of lenders, as lots of credit checks could be damaging to your overall credit score.
What is a mortgage offer?
A mortgage offer is official confirmation from a lender that it will provide you with a mortgage, unlike the AIP, which is simply an indication of how much you could borrow.
What a mortgage/agreement in principle isn’t
It isn’t a mortgage offer. That means, when you have found the property you want to buy, had the offer accepted and want to start the house buying process, you will still need to make a full application for a mortgage. If you applied for your AIP through a mortgage broker, they will use the information you provided previously as your full application, but they will want to check that it is all still correct.
An agreement in principle doesn’t guarantee anything
An AIP doesn’t guarantee you will definitely get a mortgage since it’s not actually a mortgage offer. And, if the lender finds something you haven’t mentioned before that negatively impacts your ability to get a mortgage – such as a change in your job situation, or a change in your income levels, they could change their mind about whether they will lend to you, or offer you a lower amount or possibly a different interest rate.
Why get an Agreement in Principle?
Reassurance: – AIPs can give you a good overall indication of the amount you will be able to borrow. Provided there is no major change in your situation when the time comes to complete your full application, an AIP is often a good pre-cursor to a full mortgage offer. It can also be reassuring to know whether a lender is prepared to lend to you – especially if you’re concerned about your credit record.
Credibility: – An AIP shows you can actually afford the property you’re interested in, and so gives you more credibility with estate agents. Some agents won’t agree to show you a house unless you have an AIP that shows you could afford the property, particularly in competitive areas where things move really quickly. As arranging an AIP also requires some effort on your part, it helps you come across as a committed and serious property hunter, and again in competitive property market areas you will miss out on being able to view some properties without one.
How long does it take?
Your mortgage broker will want to get to know you first, through their initial fact-finding – to ensure they know what your circumstances are and your personal preferences for the mortgage. Once they have gathered their recommendations and you’ve agreed a way forward, you may be able to get a decision on the Agreement in Principle the same day as applying. Other more specialist lenders may need a couple of days to get back to you.
What can impact the full mortgage application?
If your personal circumstances change, it could impact your mortgage offer. Anything that reduces your income or increases your outgoings: – if you have started a new job, or been made redundant. Also, your full mortgage application will consider things like whether you’ve recently taken out a personal loan, and even if you go on maternity leave. This is why it’s important to understand that an AIP isn’t the same as a formal mortgage offer, it’s simply a good indication on your probable house buying levels.