Do you Need a Mortgage Agreement in Principle?James Trafford
Also known as an “approval in principle” or a “decision in principle”, a mortgage agreement in principle is a written estimate of how much you would be able to borrow from a certain mortgage lender. However, this is not a legal mortgage agreement or a guarantee of a mortgage. Buyers might use an agreement in principle to get an idea of how much they can borrow. As a result, this might help you determine how much money you can afford to spend on a property.
A mortgage AIP is not a mortgage offer
In contract law, for a contract to be legally binding, there needs to be: a) an offer; b) acceptance; c) consideration. Not only is an AIP not a legally binding loan offer, it does not ensure that you will get one. There is no legal obligation on either the buyer or lender to follow the AIP.
In order to make an offer on a house, you will still need to apply for a mortgage and get the green light from the lender. In order to acquire the house you want to purchase, you will need a valid mortgage offer.
A mortgage is a loan from a lender that you use to buy a property. Over a period of 25–35 years, this loan will be repaid in equal monthly instalments, plus interest, and the value of the property will be used to secure the loan until it is repaid. There are many different types of mortgages that you may choose from, depending on your financial situation.
What’s the purpose of securing an agreement in principle?
Getting an AIP from a mortgage lender is an advisable move before you begin the application process. Even though it’s not a must, potential homebuyers gain a great deal of value from it. For example, an AIP will indicate to you that you are able, theoretically, to at least borrow what you need to buy a property. Furthermore, if you have an AIP, you’ll demonstrate to sellers and real estate brokers that you’re serious about acquiring a house and can genuinely afford the one you’re interested in. To avoid time-wasting, some estate agents may want a copy of your AIP before they show you any houses.
The mortgage agreement in principle application process
Any bank, building society, or mortgage broker can grant you an agreement in principle. It doesn’t have to be a bank that you already have an account with. Typically, AIPs are free to obtain.
Personal and financial information like your income and expenses is required by the lender. If you’ve already started the procedure, it’s a good idea to have a few supporting documents on hand, such as:
- Pay slips. If you are employed, the lender will typically want to see up to six months’ worth of pay slips. However, if you are self-employed, they will want to cover a longer period, up to about three years’ worth of accounts.
- Proof of address. Utility bills no older than 3 months old are usually the best form of proof of address.
- Bank statements. About six months’ worth of bank statements is usually enough to show how much money you spend each month on average.
- Proof of ID. Photo ID like passports and driving licences will be required. Be sure to check well in advance that these documents are up-to-date and still valid, as this can slow down the application process if they are not. Also, check that they have the correct address.
While you’re comparing lenders and looking at houses, it’s a good idea to have an idea of what kind and size of property you want to buy. How much you may need to put down as a deposit, as well as how much money you need to borrow, will be determined by this. Keep in mind that relocation expenses will necessitate setting aside funds for.
The process of applying for a mortgage agreement in principle can typically be done via the lender’s website and takes only about 15-20 minutes to complete. Alternatively, if you attend a mortgage interview with a lender, you can also apply during this time.
You can expect to hear back from the lender within about 24 hours to know whether you have been successful, and you will receive a certificate which is valid for up to 90 days, setting down details like how much you could theoretically borrow if you were to take out a mortgage. Of course, a full mortgage application process will take much more time to complete and will be more involved in terms of checks carried out and the information the lender will want.
The lender will want to review your credit score and history
In order to secure an agreement in principle, the mortgage lender will conduct a credit score check and analyse your credit history. A certain credit score will be needed to secure a mortgage, and your lender will be able to advise you on what that will be.
Having a good credit score will increase your chances of getting a mortgage agreement in principle. If you have a high credit score, more favourable mortgage options may be available to you, such as better interest rates or the amount you can borrow.
Credit checks may be either “soft” or “hard,” and understanding the difference is critical. Because it isn’t visible to other lenders, a “soft credit check” doesn’t have any effect on the applications you make in the future.
Although a hard credit check may be viewed by anybody reviewing your credit record, it can also have an impact on your future credit applications. Numerous factors might influence your credit score, some of which may come as news to you, such as changing your address many times in the last few years, which might hurt your credit score.
Improve your credit score to improve your application chances
There are several things that you can do to keep an eye on and improve your credit score. For example, prior to your AIP application, conduct your own credit score by using one of the recognised companies that can do this for you.
Start by checking that all the details held about you are correct, since incorrect details, like wrong address, etc., can go against you with your credit score. Other useful things you can do are: register yourself on the electoral register; keep up-to-date with your credit card payments and don’t max out your card allowance; pay all your bills on time without missing a payment.
What reasons would result in an AIP being refused?
There are various reasons why an applicant may be refused an AIP, and these include the following:
- Bad credit history. A bad credit history could be the result of missing just one payment on a utility bill. Alternatively, if someone has a lot of debt accumulated, this indicates they are not good at controlling their outgoings.
- If someone is not registered to vote, then this will go against them.
- There may be something in your spending patterns or history that has the lender worried about your ability to manage your finances in a responsible fashion. Repaying a mortgage is a big responsibility, and so the lender will want to see if you can do this based on your past behaviour.
- Lenders have certain criteria for demographics, and if you don’t meet them, this can result in refusal.
What effect will an AIP have on my credit score?
Your lender will decide which type of credit check you require based on the information they have about you. For example, if you have something in your history that the lender finds concerning, they may require a hard check to be done. Whether an AIP will have an effect on your score will be dependent on what type of check the lender requires to be done.
Typically, a lender will require a “soft credit check” to be done. It is called a “soft” check because it doesn’t leave behind evidence of a check being carried out and therefore will not have an impact on your credit score. Requiring a soft check indicates that the lender hasn’t got any concerns about your financial history or credit worthiness and involves checking whether the background information you gave them is accurate.
If a lender requires you to have a “hard check,” on the other hand, it means there’s something they are concerned about and want to look deeper into your financial score and history. This type of check will leave a “footprint” of sorts and alert others that someone has been looking deeper into your credit score. Although a hard check doesn’t automatically result in an adverse effect on your credit score, it may in fact do so because it may signal that you are desperate to borrow money, which further indicates that you have problems with sound financial management.
To help reduce the likelihood of too many hard checks being carried out, try to leave up to 6 months between applications for credit. It’s advisable to ask your lender in advance what type of credit check they intend to conduct, especially if you have concerns about what the check could do to your credit score.
Is it possible to be refused a mortgage even after being granted an AIP?
Yes, it is possible for this to happen. An AIP is a theoretical amount that someone can borrow for a mortgage if they are successful in their application and is not based on any particular property or transaction. For example, if your financial circumstances change by the time you apply for a mortgage, or if the lender is concerned about the valuation or survey results of the property you are interested in, a mortgage can be refused despite there being an AIP in place.
However, because one lender refuses you a mortgage, it doesn’t mean the next one will either. Hiring a mortgage broker can help reduce the likelihood of being refused because they will endeavour to match you with the right mortgage lender based on your personal circumstances. If you are self-employed, for example, there are certain types of lenders who would be best suited to your circumstances as they have specialised knowledge and experience in lending to these types of workers.
Lastly, a common question that arises is whether someone has to have an AIP in place before they can make an offer on a property they have seen. The straightforward answer is that there is no requirement that you have an AIP. However, some sellers and estate agents may not consider your offer a serious one without an AIP, as it may indicate you’re not organised or ready to place a serious offer.