Attempting to get your foot on the property ladder is hard and once you are even on it, taking the next step up can often be tricky. In most cases, regardless of your position on the ladder, you’ll need a mortgage, but before getting the mortgage itself, you will need an agreement in principle.
Whether looking for a first time buyer mortgage or you need a mortgage for moving home for what seems like the tenth time, you’ll likely need an agreement in principle before getting anywhere. The agreement in principle demonstrates how much a lender may be willing to lend you for purchasing a home. They provide added assurances to the seller. It is worth noting though that the amount shown in an agreement in principle is not guaranteed.
In this edition of our blog, we look at the mortgage agreement in principle and show you how it affects your house-buying journey.
Is an agreement in principle the same as a mortgage in principle?
Yes. Some lenders refer to an agreement in principle or AIP, as a mortgage in principle, or MIP or a decision in Principle, or DIP. Whilst how a lender refers to them differs; they are the same thing. An AIP, MIP or DIP simply state how much a lender would consider letting you borrow to purchase a house.
Is an agreement in principle the same as a mortgage offer?
No, and this is perhaps one of the most common misconceptions. An agreement in principle indicates how much the lender is willing to let you borrow and the fact a mortgage lender is happy to consider a mortgage application for you to purchase a property, whereas the mortgage offer is an official document which is given to you once you have provided all the necessary documents to the lender for them to assess your application and they have agreed it.
It becomes legally binding once you complete on your mortgage and buy your property.
Compared to the agreement in principle, a mortgage offer incorporates much more of your information. From employment history to the condition of the home you are buying, through to your current expenses, the lender will want much more information to garner how risky it is for them to lend you the money. If, for example, they don’t value the home in the same way your estate agent does, they might lower their mortgage offer or cancel it altogether.
How do I get a mortgage agreement in principle?
In most cases, an agreement in principle is a quick and easy process. You could approach a lender directly or speak to a mortgage broker. Often, you can just complete an online form, but in some cases, you could visit a lender or broker in person. Either way, the process is quick, and simple and can have instant approval or rejection.
You’ll need details of your income and any expenditure, proof of your ID and address (normally over three years), and how much you want to borrow. You’ll also need the evidence to back these things up. So, fish out those payslips, bank statements, current mortgage or rent agreements, and utility bills.
Then, if you apply online, complete the form and submit. If visiting a broker, let them take care of it.
In many cases, especially if completing your application online, the outcome is instant, allowing you to then push forward and get an official mortgage offer.
Does an agreement in principle affect my credit score?
You might think with all the evidence you’ve had to provide that applying for a mortgage agreement in principle might affect your credit score. It does sometimes but not always. When you go to your broker or lender and apply for an agreement in principle, a soft credit check is sometimes carried out. Soft credit checks do not affect your credit rating at all. Should you wish to proceed with a mortgage application after receiving your AIP, you’ll find that a full credit check is then carried out. It is this hard/full check that can affect your credit score.
How long does an agreement in principle last?
Once you have received your agreement in principle you typically have 30-90 days before it expires. If after this time, you have not applied for a mortgage, your AIP will expire, and you’ll have to seek a new one. In some cases, lenders may be open to extending the agreement in principle, but this varies per lender, so it is best to check before you apply for an AIP.
Do I need an agreement in principle?
It is not a legal requirement to have an agreement in principle and you don’t need an agreement in principle to get a mortgage, but it certainly helps. The estate agent that you view the property you wish to buy will certainly want a copy of an AIP before you can make an offer to ensure you are able to potentially get a mortgage and not wasting theirs, or the vendors time.
It not only gives you an idea of how much money you are likely to be able to borrow but it also helps you reassure sellers that you are serious about moving house.
When it comes to being offered a mortgage, a lender will simply run through the affordability checks and the application process for a mortgage and come to their decision.
Can I have more than one mortgage agreement in principle?
Yes. In theory, you can. You could, for example, go to a variety of lenders and find that each shows you could be eligible for different mortgage amounts. Where one might be happy to lend £300,000, another may only wish to lend £250,000. You do not really need more than one AIP so no need to get more than one really.
What should I do if I’m refused a mortgage in principle?
The reasons for refusal could vary. You may not meet one lender’s criteria, but you might be more than suitable elsewhere. You could look to apply with the initial lender again or try elsewhere. Regardless, look at the reasons for rejection and address them before reapplying. That way you improve your chances of approval and the better offers. Using a mortgage adviser will improve your chances of being approved in principle first time because they look at your circumstances and will go straight to the lender with the cheapest rate who will approve you first time.
Is the amount in my agreement in principle guaranteed?
No, the agreement in principle is simply a guide of what you might be able to borrow. When it comes to applying for the mortgage itself, their criteria may have changed, their rates may have altered, or your personal circumstances may have changed. This could mean that the actual amount offered differs from the amount shown in your mortgage agreement in principle.
Mortgages can be tricky to navigate, and will no doubt cause you plenty of headaches as you try to move house. Remove the stress by speaking to the team at Mortgage Saving Experts. In our role as mortgage brokers, we help those already on the property ladder, and those looking to take the first step reach their property goals. Why not contact our team of mortgage experts today to see how much money you could save?
