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© GetAgent Limited 2022
  1. Blog
  2. Mortgage agreement in principle explained
Home buying tips & advice
07 January 2022

Mortgage agreement in principle explained

GetAgent Team

Buying a home can be a long and stressful process, especially if it's your first step on the property ladder. But you can ease that stress a little by receiving a mortgage agreement in principle (AIP). An AIP takes you one step closer to getting your dream property, but what is it, and how does it work?

What is a mortgage agreement in principle?

A mortgage agreement in principle is an indication from a mortgage lender that they would be willing to lend you a specific amount of money for a new property. The lender will tell you how much they would be willing to offer based on the information you provide about:

  • Your income
  • Your spending habits
  • Any existing debts or debtors you owe

An AIP is an easy way of finding out whether you can borrow the amount you need to buy a home without performing a full credit check.

What is the difference between a mortgage AIP and a mortgage offer?

An AIP is the amount of money a lender would let you borrow, in theory, based on the information you self-report when applying.

However, you'll receive a mortgage offer after making a full formal application. The lender verifies your income, spending and deposit funds, and a full credit check is performed in the full application, unlike the AIP. The offer itself is an exact amount that you'd be allowed to borrow, based on your actual finances.

Does an agreement in principle guarantee a mortgage?

The short answer is no.

Though the AIP indicates the lender's willingness to lend to you, it does not guarantee that you'll get the same amount from them on the actual mortgage offer. This is because the actual offer depends on the proof you'll provide of your exact income, which the lender will use to ensure you can afford the agreed amount.

Your mortgage offer will also depend on the value of the property and how much you offered for it. For example, if you offered way over the asking price, your mortgage provider may not give you the full amount required as they won't deem the property 'worth' the amount you've said you'll pay.

As well as the above examples about the value of a property, many factors can change between the agreement in principle and an official mortgage offer, including;

  • Market conditions
  • Credit checks and any issues with your credit file
  • Changes in circumstances (such as losing your job or changing roles with different salaries)
  • The valuation amount of the property you want to purchase

You can ready more about what to do if your mortgage is declined here.

How reliable is a mortgage agreement in principle?

The agreement in principle is a reliable figure to use as an estimate of how much you'll be allowed on a mortgage. If you gave accurate figures to get the AIP, the mortgage application will be much the same. You'll only run into difficulty if the income figures you used were not correct, or you cannot prove your income.

How to get a mortgage agreement in principle

  1. First research the mortgage providers that will best fit your needs and which providers have the best offers available.
  2. Then you can get an agreement in principle in person at a branch (which many high street banks offer) or online (both online providers and traditional banks have website portals you can use to get an AIP).
  3. You'll be required to fill out some information about your income, spending habits and debt.
  4. The AIP application will not run a full credit check, but it is essential that you are honest with the figures. If you aren’t, you could make an offer on a house and have the mortgage declined after the full credit check.
  5. You'll receive an AIP during your appointment at a branch or almost instantaneously if you're applying online.

What do I need to get an AIP?

You will need the following for an AIP

  • Proof of total income for the last 3 months
  • Proof of total income or earnings over 6 months if you’re self employed
  • Bank statements covering all spending and outgoings for the last 3 months
  • Records/totals of any outstanding debt, loans or credit cards

Pull together your income total for the last three months so you have a detailed understanding of how much you bring in every month through your salary. If you are self-employed or your income fluctuates, you might want to take an average of your monthly income over six months, so you can show that you still have a high enough income to afford a mortgage even if it changes month to month.

Gather your bank statements, as you'll need to fill out some information about your spending. You should know as much about your outgoings as possible, such as any regular payments you have to make, such as childcare, insurance, car finance.

You should also total up any existing debt you have, such as loans or credit cards. This information will allow the lender (or their website application) to calculate how much you can afford to pay every month toward a mortgage, on top of your existing financial responsibilities.

How much does it cost to get an AIP?

It's free to get an AIP online or in a branch from most lenders. However, you may pay for an AIP if you use a mortgage advisor or independent consultant.

How long does a mortgage agreement in principle last?

A mortgage agreement in principle will usually last and stay valid for between 60 and 90 days. So you have a couple of months to put an offer in and have it accepted when you receive your AIP. If the AIP has expired, you may need to get another one before a lender carries out the full application, but every provider is different, so check the small print.

Why should I get an AIP?

The main benefit of getting an AIP is that it indicates how much you can borrow from a lender. The AIP helps you understand what price range your home can fall into and be safe in the knowledge that you'll actually be able to afford it.

An AIP is especially useful in competitive areas where properties are viewed and sold very quickly. The AIP gives you more credibility in a fast-paced market because agents will see that you're in a position to move forward quickly should your offer be accepted.

When should I get an AIP?

It can be helpful to use mortgage calculators first to figure out how much you'll likely be able to borrow. You should get an AIP when you think you're ready to start viewing properties and making offers. The AIP will last 2-3 months, so don't wait too long to get one or you might miss out on a property because you don’t have the AIP to tell you that you can afford it. That said, don't leave it too long after you get the AIP to make an offer or it could expire.

FAQs

Can I put an offer on a house without a mortgage agreement in principle?

Yes, you can put an offer in without an AIP, but you may find that sellers or agents will be unlikely to accept the offer, given that you haven't had your funds verified or an indication from the bank about your eligibility.

Does getting an AIP affect my credit score?

No, an AIP will not affect your credit score as it is not a formal check and is based on self-reported figures.

Why does my mortgage offer differ from my AIP?

There are a few reasons why your official mortgage offer can differ from the amount you were given in the mortgage agreement in principle:

  • You have offered too much for the property, and the lender will not loan you the total amount as the home is valued at a lower price.
  • Your credit score is lower than anticipated, so the lender will not give you the full amount needed to purchase the property.
  • Your self-reported figures on your AIP do not match your actual income or spending.
  • You've changed address, applied for credit cards or other activities that might affect your credit file in the run-up to applying for the mortgage itself.
  • You have changed jobs, and your income has changed, meaning the mortgage offer is likely different from the initial AIP you were given.

Other factors can affect an official mortgage offer, but ask your provider, and they should help you understand why the amount you can borrow has changed.

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