What is a mortgage agreement in principle?

An agreement in principle is an estimate from a mortgage lender of how much they might be prepared to lend to you in order to buy a property.

If you aren’t ready to get an agreement in principle, you can use a mortgage calculator to get an indication of how much you may be able to borrow.

What does a mortgage agreement in principle mean?

An agreement in principle (AIP) – also referred to as a Decision In Principle (DIP) or Mortgage In Principle (MIP) – is a written estimate or statement made by a lender to say how much money it would lend you if you were to buy a property.

The aim of an AIP is to give you a clearer idea of how much you could afford to borrow. This means that you can browse properties in your price range and eventually aim to put an offer in on one! 

Many estate agents (and sellers) will only take you seriously if you have an AIP.

An AIP is not the same as a formal mortgage offer, so you will still need to apply for a mortgage once you’ve had an offer on a property accepted.

It’s also useful if you are thinking of remortgaging and want to find out how much more you might be able to borrow, based on the equity you already have in your home.

How to get a mortgage in principle

You can usually get a mortgage in principle online, over the phone or – if applying to a bank or building society – in branch.

You’ll need to give basic personal details including your salary, how much you’d like to borrow, and what all of your monthly costs roughly add up to.

The mortgage lender will then check your credit file to gauge your financial status and calculate what it might be prepared to lend you.

A mortgage in principle is not a formal mortgage offer, nor is it a guarantee that the lender will give you a mortgage in the future.

Do I need an AIP to make an offer on a property?

Not officially, but having an AIP does make estate agents and sellers view you as a serious buyer and not a time-waster. It could also speed up the house-buying process, which can often drag on.

How long does an AIP take?

You can complete the whole process online - it should only take about 15 minutes to get a mortgage in principle. Filling out the online forms with some lenders can even provide you with an immediate quote. Doing it over the phone or in-branch may take longer.

Once you have your agreement in principle, you can look at properties that fall within your specific price range; that is, the amount you could potentially borrow, plus any deposit you might have saved up.

Will an AIP affect my credit rating?

When considering how much money to lend, the mortgage lender will need to check your credit history to ensure you would be able to meet the monthly payments.

To do this, some lenders will perform a “soft” credit check, which means they do not need to ask your permission to do it and it will not affect your credit score. It’s essentially a background check to ensure the details you have provided are correct.

However, some lenders may wish to do a full credit check before giving you an AIP and should ask your permission beforehand.

How long does a mortgage in principle last?

A mortgage AIP will usually last for up to 90 days and can help speed up the process of applying for a formal mortgage, as a lender can use the AIP to complete your application. Remember that when applying for a formal mortgage, you do not need to use the same lender that has given you the AIP.

Credit Check warning

Full credit checks leave a “footprint” on your credit file. Numerous footprints on your file can negatively impact your score, simply because it suggests an element of ‘desperation’ to borrow money. Therefore, lots of applications may count against you when you come to make a full mortgage application. 

Generally speaking, aim to leave about 3 to 6 months in between applications for any kind of credit.

Making a full mortgage application

If you have an agreement in principle and you decide to make a full application with that lender, you will need to provide more detailed personal information. The lender is not obliged to lend you the full amount outlined in the AIP. 

How much it lets you borrow and at what interest rate depends on a more detailed analysis of your finances.

The mortgage lender will look closely at your full financial history, including bank statements, salary and any additional income, employment and address history, how much of a deposit you have, and any other savings. This is what’s known as an affordability check.

You’ll then be offered a mortgage based on what the lender believes you can afford to pay. It may be more or less than you had originally anticipated.

Even if you’ve secured an AIP, you may not get a formal mortgage offer. This could be for any number of reasons, such as you’ve recently been declared bankrupt, your financial history is incomplete, or you’ve only been employed for a few months. 

There are some mortgages specifically for those with bad credit.

It may also be the property itself that causes you to be turned down for a mortgage, such as if it’s listed, was formerly used for commercial purposes or has recently been affected by subsidence, which is the gradual sinking of land causing the ground under a house to collapse. 

22 October 2020