Mortgage Agreement in Principle

If you are currently going through a mortgage process, you will have come across lots of different phrases and terminology. One of those phrases you will hear from lenders or mortgage advisors is a mortgage agreement in principle. A mortgage in principle gives you an indication of how much you can afford to borrow on a mortgage. It’s a useful tool to have when you are looking for a new home. Not only does it give you a budget for your new property, but it shows the estate agent that any offer you make is more likely to go through to completion.

Here Friends Capital explain further about a mortgage in principle and how you can use one when buying a new house.

A mortgage agreement in principle – what is it?

A mortgage in principle is sometimes called an agreement in principle (AIP) or decision in principle (DIP). If you go to a lender, they may offer you a mortgage in principle. It is a written estimate from a mortgage provider stating how much they may lend you. It’s not a guarantee that the lender will give you a mortgage, but it can be useful information. An agreement in principle gives you a good indication of what a financial institution is willing to lend you for a mortgage.

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Should I apply for a mortgage in principle?

The house buying process can feel confusing, and you may be wondering if you should apply for a mortgage in principle. The method of applying for a mortgage in principle is quicker and easier than a full mortgage application. You can usually get an answer quickly, from within an hour or a couple of days. Mortgage applications can take much longer to process. Getting a mortgage in principle amount allows you to narrow down the search for a new house and gives you a realistic budget.

You don’t have to get a mortgage in principle, but various reasons make it a good idea:

  1. You get a good idea of what you can afford to borrow. It helps to narrow down your house-hunting search ruling out properties above your budget or opening up homes you may have believed to be out of your price bracket.
  2. Estate agents and sellers will take your offer seriously. Sometimes you may not be offered a viewing unless you have a mortgage in principle.
  3. With a realistic idea of what a lender will give you on a mortgage, there is less risk of applying for a bigger mortgage that gets rejected. A mortgage rejection impacts your credit file negatively and can make it more challenging to get the mortgage you want.

When will I need to apply for a mortgage in principle?

If you have made the decision to move and you are serious about looking for a new home, apply for a mortgage in principle. Knowing what you can afford makes the task of finding and buying a new home much more straightforward. 

It can also be a big confidence boost to know which houses are in your budget. A mortgage in principle can also save you time in the buying completion process. It can help with getting your offer accepted and may even make the mortgage application process quicker.

Does a mortgage in principle affect my credit rating?

A mortgage in principle does require a credit check. The application process will involve either a soft or a hard search on your credit file. The type of search done during the application process will depend on the lender.

soft search checks your credit report without leaving a ‘footprint.’ It isn’t visible to other lenders, so it shouldn’t affect your credit file.

hard search does show on your file as a credit application. A hard search shouldn’t affect your overall credit rating. Still, if a lot of hard searches go through in a short space of time, lenders may reject any future credit applications. It is worth checking which type of search will be done by your chosen lender before completing the process.

Good news – FriendsCapital has partnered up with UK Credit Ratings, check your credit report here

How long is an offer valid?

A mortgage in principle may last between 60 and 90 days, depending on the lender. If you don’t find a property during that period, you may have to apply for another. Renewal should be straightforward unless circumstances have significantly changed.

You should note that if any of the details you give on your application change, such as a new job, you should check that your mortgage in principle is still valid. You may have to renew the application in certain circumstances.

How to apply for a mortgage in principle

To get a mortgage in principle, you can choose to go:

  • directly from a mortgage lender (bank or building society)
  • through a mortgage broker

As a rule, it’s usually better to use a mortgage broker. Brokers have access to a variety of mortgage options, many that you won’t be able to get through a high street bank. A mortgage broker also saves you time as they can identify which lenders are better for you based on your circumstances. You will be able to call the broker when an offer is accepted and complete the full application.