What is a Mortgage Agreement in Principle?
An agreement in principle (AIP) is a written estimate stating how much you may be able to borrow from a particular mortgage lender. It is not a formal mortgage offer or a guarantee.
An AIP is also referred to as:
- A mortgage in principle
- An approval in principle
- A decision in principle
An agreement in principle offers a handy guide for buyers on how much they can theoretically borrow. In turn, this can help you set your house-buying budget. In this Compare My Move guide, we have worked with expert property journalists to explain the purpose of an AIP and why it’s an important element of the house buying process.
What is the Difference Between an AIP and a Mortgage?
An AIP is not a formal mortgage offer and does not guarantee a mortgage. The AIP is not binding on either the homebuyer or the lender.
Once you have found a property you want to make an offer on, you will still need to complete the full mortgage application and be approved. The formal mortgage offer is what you will need to proceed with buying the property.
A mortgage, however, is a loan that you borrow from the bank, building society or mortgage broker to buy a property. This is paid back in monthly instalments over the course of around 25-35 years, with added interest. This is secured against the value of the property until it is paid off. The type of mortgage you choose will be up to you and your circumstances.
Why Do I Need to Get an Agreement in Principle?
Reassurance - An agreement in principle will give you the reassurance that you can borrow the amount needed to purchase a home.
Credibility - An AIP will indicate to sellers and estate agents that you are serious about purchasing a property and show that you can actually afford the property you’re interested in. Some estate agents will want to see an AIP before showing you properties.
How Do I Get an Agreement In Principle?
You can apply for an agreement in principle with any mortgage lender. It doesn’t have to be your current bank. An AIP is normally free.
The lender will need basic personal and financial details, such as your income and outgoings. At this stage in the process, supporting documents won’t be required but it can be useful to have these prepared.
Documents you may include:
- Payslips (usually for three to six months); or two or three years of accounts if you are self-employed
- Utility bills as proof of your current address
- Six months’ worth of bank statements to show your outgoings
- Photo ID, such as a driver's license or passport
Whilst you’re comparing lenders and house-hunting, it would be helpful to have an idea of the house you’d like to buy, such as size and location. This would give an indication as to how much of a deposit you can put down and how you would need to borrow. Keep in mind that you will need to have money set aside for the cost of moving house.
When it comes to the house purchase, a conveyancing solicitor will liaise with your mortgage provider to assist with the legal aspects of your buying a property.
How Long Does It Take to Get An AIP?
You can normally apply for an AIP online on a mortgage lender’s website. According to Halifax, the AIP application will normally take about 15 minutes. You can also apply for an AIP during your mortgage interview.
The lender will usually make a decision within 24 hours and send you a certificate showing how much you can theoretically borrow. It’s important to understand that a full mortgage application will take much longer.
An agreement in principle is normally valid for up to 90 days.
Will a Credit Check Be Required for an AIP?
As part of getting an agreement in principle, the mortgage lender will review your credit score and look at your credit history. They will be able to give you an idea of the credit score needed for a mortgage.
The better your credit score, the more likely you are to be accepted for an AIP. An excellent credit rating can mean you are eligible for better mortgage deals.
It’s important to know that credit checks are either soft or hard. A soft credit check can’t be seen by other lenders checking your credit report and will have no effect on future applications.
A hard credit check, however, can be seen by anyone else checking your credit report and may influence future credit applications. Your credit score can be affected by a variety of factors, some of which may come as a surprise. For example, multiple address changes in recent years can lower your credit score.
Here are a few ways a credit score can be improved:
- Before applying for an AIP, you check your credit score via sites such as Experian and see if and how it can be improved.
- Check that all details on your file are correct as having something simple such as a slightly wrong address can impact your score.
- Being on the electoral register can boost your score.
- Having a credit card which is paid off in full on a regular basis can also contribute to a positive credit score, showing that you can handle money responsibly.
- Pay bills on time and in full each month to show lenders you’re a reliable borrower.
- Close down any credit cards you no longer use.
- Aim to keep your credit utilisation low. This is the percentage you use of your current credit limit. For example, if you have a limit of £3,000 and you’ve used £1,500, your credit utilisation is 50%.
Why Would an Agreement in Principle Be Declined?
There are a number of reasons why you might be declined for an agreement in principle. These include:
- You have a poor credit history such as missed bill payments or a large amount of debt.
- You’re not on the electoral roll.
- The lender has concerns about your spending or the way you manage your money.
- You don’t fit that particular lender’s demographic.
Will an Agreement in Principle Affect My Credit Score?
Whether an AIP will affect your credit score will depend on the type of credit check the mortgage lender requires.
Soft Credit Check - Many will run a “soft credit check”, which doesn’t leave a “footprint” and won’t impact your credit score. This will be to ensure the details you have provided are correct, similar to a background check.
Hard Credit Check - A full check - known as a “hard check” - will leave a footprint on your credit rating. If you apply for several AIPs which require hard checks, this could potentially hurt your credit rating as several of these “footprints” can suggest desperation to borrow money.
Aim to leave 3 to 6 months between applications for any kind of credit. If you are concerned about the impact on your credit score when applying for an agreement in principle, check with the mortgage lender which credit check they will use.
Can I Be Denied a Mortgage After Receiving an AIP?
In short, yes. An agreement in principle is not a promise or guarantee of being able to borrow money or being linked to a particular property.
That said, being declined by one lender doesn’t mean you won’t be approved elsewhere. A mortgage broker can help you find a lender most suited to your circumstances. For example, some lenders specialise in self-employed borrowers or those with past credit problems.
Do I Need an AIP to Make an Offer on a Property?
You are not required to obtain an agreement in principle to make an offer on a property. Estate agents are obliged to pass on all offers made on a property to the seller.
However, having an AIP will show the seller that you are organised, reliable and serious about buying the house. In short, it will encourage the vendor to take your offer seriously.
Potential buyers with an agreement in principle are more likely to be seen as favourable by both estate agents and sellers. Additionally, you will be better prepared to make an offer if you have an idea of how much you are able to borrow.
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