Mortgage in principle

by | Nov 19, 2022

Introduction

Mortgages can be hard to gain approval for and are a heavily regulated process in the purchase of a home. An AiP or a mortgage in principle is a stage in the mortgage application process that has to be understood in detail before you make this bigger step.

There are situations where you can ruin a credit score if you don’t understand how they work but at the same time, they are an essential document if you plan on buying a home. So it is a difficult balance between treating a mortgage in principle with caution and having the confidence to use one at the same time.

The keys for a house with a mortgage in principle

What does a mortgage agreement in principle mean?

A mortgage agreement in principle is a type of agreement that is issued by a lender to someone who is interested in taking out a mortgage as a gauge as to whether they can be approved for the mortgage given the rest of their credit check is sufficient.

The pieces of information a mortgage in principle will use are things like income, bank history and if you are in any debt. It is useful to think of a mortgage in principle as an indication as to whether a buyer will gain approval for a mortgage for a home rather than a conclusive agreement.

What is the meaning of an AiP?

An AiP stands for an Agreement in Principle and is the same thing as a mortgage in principle. It is an official document from a lender that shows a buyer is eligible for a mortgage based on the initial checks they have done on the buyer without going into detail. 

This is commonly used when a buyer needs proof they can take out the mortgage they need for a property purchase without needing to go through the full mortgage application process which can be a longer, more intrusive process.

Does an AiP guarantee approval for a mortgage?

No, an AiP doesn’t guarantee the approval of any type of mortgage. 

However, it may give an indication that a mortgage may be approved because if the credit check from a lender comes back as expected and the details in the agreement in principle are exactly as predicted when the full mortgage application takes place, the mortgage offer will be given.

The reason for an AiP is not for the approval of a mortgage but so a buyer can get a quick idea of the amount of money they may gain approval for when becoming a landlord or adding a property to their portfolio.

The AiP only uses the information given to the lender by word of mouth such as their rough income and the names and addresses. Based on this, the lender will then perform a soft credit check which is a check that isn’t nearly as extensive as a hard credit check where buyers apply for a mortgage legitimately.

The extent of the credit check a lender does vary quite a bit between lenders and this may be written on the mortgage in principle document too. If it is not, contacting your lender may give you an indication of what kind of credit check takes place in the check.

Can you get an AiP if you’re in debt?

There is no harm in getting an AiP as it will not affect your credit score any further for most lenders and if you do not take out multiple hard credit check AiP’s with different lenders.

Having said this, it may be worth trying to fix the credit issues you have already before getting a mortgage in principle because it will be more likely that the check will come back with positive news after you make basic fixes like paying off debts and registering to vote.

This will impact the amount you can borrow, the interest rate on the loan and potentially the type of mortgage available to you.

An wallet representing poor credit score of someone applying for a mortgage in principle

Is the information provided in an AiP used in any way?

Aside from the information being used to produce the AiP, the information may be used to process a full mortgage application if you choose to go ahead and do this with the same lender. Occasionally, a lender may still ask for more information in this case but this will be made clear once you start applying for the mortgage.

The information will be used to produce a credit check which is a check on your credit report, gauging how well you managed credit,  money and debt in the past to give lenders a future indication of how trustworthy you will be with a mortgage.

What do you need for a mortgage agreement in principle

The extent of information asked for in the application of a mortgage in principle is dependent on the lender. With some asking for more information than others.

On the low end, it may be typical for a lender to ask for basic information like your date of birth, name, address, amount you earn and amount you want to take out in a mortgage.

However, a lender may ask for a lot more and perhaps even do a hard credit check that looks at the credit score of someone and maybe goes into detail about if they are in any debt and what kind of debt this is.

A general guideline of the information you need to have available before you do a mortgage in principle is:

  • Personal details
  • Current address
  • Previous addresses
  • Your income relative to your expenses
  • If you are in any debt
  • The amount of deposit you have available
  • The length of time you wish to take out the mortgage for

Will a mortgage in principle affect your credit score?

A mortgage in principle may affect your credit score if the lender is doing a hard credit check for their AiP. However, most of the time this won’t actually be the case and you will be able to get a mortgage in principle without it changing your score given you conduct a mortgage in principle sensibly.

In order to remain sensible, you will need to ensure you don’t apply to multiple lenders at once for multiple different Agreements in Principle in quick succession. This will likely reduce your credit score because this behaviour is seen as desperate in the eyes of a lender. To check your credit score to see if you think you have made this mistake click here.

How long does a mortgage in principle last?

Commonly, an AiP will last for 90 days. This may be more or less between lenders but this is the figure most people in the industry use for both AiPs and mortgage offers.

Within these 90 days, a buyer can use the principle to apply to show to estate agents and landlords any evidence of what kind of mortgage they are eligible for and at how much.

How long does a mortgage in principle take?

Depending on the lender and the type of mortgage you apply for, an AiP can take anywhere from 15 minutes to up to a couple of days to be completed.

Some companies will mail this as a certificate to you or will provide the documentation to show that you have an AiP in place digitally.

A landlord receiving an AiP digitally

Is it possible to get a mortgage in principle if you’re a first-time buyer?

It is certainly possible to get a mortgage in principle unless a lender specifies that they don’t lend to first-time buyers. In fact, it is recommended in most cases to have one because estate agents will take you more seriously when making offers on a property. 

In addition, some sellers will ask their agents to only deal with buyers who have an approved AiP in place, especially those who have never made a property purchase before.

What are the benefits of having a mortgage in principle?

The great thing about having a mortgage in principle in a place is it allows you to have confidence in making offers on properties. In addition, some estate agents and letting agents will not take you seriously before you have a mortgage in principle approved.

In addition, a mortgage in principle tells a buyer how much they will likely be able to borrow which allows them to narrow down their search for properties to what they can afford. 

The confidence a mortgage in principle brings can also help reduce anxiety for buyers who have had a poor credit history in the past and want to buy a home.

What does the mortgage in principle include?

The main thing that a mortgage in principle will let you know is how much you can borrow in a mortgage. Other than this there are some other details a lender could write on the document such as:

  • The estimated monthly repayment of the loan
  • The estimated interest rate
  • The applicant’s name
  • The date of issue
  • The date of expiry
  • A reference number
  • The extent of the credit check
  • The credit reference agency used e.g Experian

Is there a difference between an AiP and a mortgage offer?

It is helpful to think of an AiP as the first stage in gaining approval for a mortgage that isn’t a mortgage offer but gives you an indication of if the mortgage offer is able to be approved based on the initial information given. Like a less thorough check.

Therefore there is certainly a difference, a mortgage in principle is just an indication of if you can get approval for that mortgage and a mortgage offer is an approval for the money used to buy a house given the property in question matches up to the mortgage terms.

What should you do after you receive an AiP?

Once you’ve gained access to an AiP, it should be clear what type of loan and how much mortgage you are able to gain approval for. As a result, you can begin making offers for properties or at the very least visit properties within your budget with the confidence that you will be able to make an adequate offer to the seller.

If you are not happy with the offer you have in your mortgage in principle, it is recommended to stick with the offer you have and perhaps only apply to one or two more lenders. Typically, all lenders will offer roughly a similar figure so there is no point in applying for a lot of mortgages in principle in quick succession as this can harm your credit score.

This is due to the fact that AiP applications can show on your credit history. If someone is seen to apply for a lot of credit quickly, this will damage their credit score significantly as it is seen as desperate by lenders.

This is not a good look for someone looking to buy a property from a lender because it makes them seem like a riskier investment overall and more likely to miss a mortgage payment. Especially after things like section 24 have been applied to the property.

A house with an offer on it using a mortgage in principle

What will a lender do with the details given in an AiP?

A lender will typically conduct a soft credit check which means they don’t go into a lot of detail in checking the validity of the information you have given them. These checks may or may not show up on your credit history. However, for harder credit checks, the check will show up on your credit check but even in this case, the information given is not visible to other lenders. It just shows there has been a check conducted.

Otherwise, if someone wants to pursue the mortgage application with the bank that offered them the mortgage in principle officially, then the bank or lender will use the information given in the AiP for the full credit check and the mortgage application will either be approved or disapproved. 

In this way, it is not worth lying about the figures given in the application for a mortgage in principle because the figures will be used later on if the deal was to go ahead.

If you do this, it will likely lead to a mortgage application being disapproved which will mean if you have made any offers on a property, the buyer chain will break down leaving the seller and estate agents of those properties disappointed. As well as anyone else involved in the deal. Advice on if a mortgage offer is declined can be found here.

Is a mortgage in principle a legally binding agreement?

No, a mortgage in principle is not a legally binding agreement because there is nothing that states the amount of money shown you are available to lend will actually be given.

This also applies to the purchase of a home, you cannot buy a home legally with a mortgage in principle as there is no sale until contracts have been exchanged based on a full mortgage application instead of an AiP.

Do you need an AiP to make an offer?

No, it is not a requirement to have an AiP in place to make an offer. Having said this, it is certainly true that estate agents and landlords will take you less seriously without a valid mortgage in principle document in place.

In some cases, they will dismiss those without a principle completely. Such strict rules may be adopted because if they allow anyone without a principle to make offers, they may have to decline other offers from other interested buyers and disappoint the seller and these buyers.

This can reduce the time it takes to sell a property significantly and makes an estate agent or landlord who is managing the sale of the property look unprofessional and cause unnecessary headaches.

For buyers, given the ease of applying for a mortgage in principle, if you are seriously contemplating buying a house, having a valid AiP will help you out tremendously so it is well worth the effort to apply.

Do you need a mortgage in principle to view houses?

Unlike making an offer on a property, there are fewer rules around visiting a property for purchase if you don’t have a mortgage in principle. However, be prepared to be questioned by the estate agent and be ready to produce a mortgage in principle if you make an offer.

Most of the time, unless specifically stated by the result of the estate agency or landlord rules, there is no need to have a mortgage in principle just to view properties.

A buyer visiting a house with a mortgage in principle

In closing

Overall, it is clear that having sufficient knowledge as a landlord can help you as a landlord or someone looking to become one. If you don’t understand how they work you can ruin your credit score. However, if you are able to use the document to your advantage, you’ll be able to make valid offers for the property and generally be taken more seriously.