Getting a mortgage in principle is often one of the first steps of buying a house. But here's the burning question: How reliable is this document, and what does it really signify?

What is a mortgage agreement in principle?

A Mortgage Agreement In Principle (AIP) is an agreement that a bank or building society is willing to lend you the money you need to buy a house. It’s proof to the homeseller (or their estate agents) that you’re capable of securing a mortgage despite not having gone through the actual application process.

How to get a mortgage in principle

Getting a mortgage in principle is pretty similar to the way in which you’d normally apply for a mortgage:

1. Connect with a lender or use online tools: Take the first step by reaching out to a mortgage provider directly or by utilising online mortgage comparison tools to find mortgage deals and request an AIP. If you want to be thorough, we recommend enlisting the help of a broker - they can help you locate the most compatible deals.
2. Get the ball rolling with an initial application: Share some basic information with the lender, such as your income, previous addresses, employment details, and financial commitments. This helps the lender assess your eligibility for mortgage options and estimate the potential loan amount they could offer.
3. Credit check for a clearer picture: The lender will conduct a soft credit check to review your credit history and gain insights into your financial circumstances. This step helps them evaluate the level of risk associated with lending to you, taking into account any previous credit agreements you may have had.
4. Assessing affordability: The lender will analyse your income, expenses, and other financial factors to determine the amount you can comfortably borrow. They will review important financial documents, such as bank statements, payslips, and tax returns.
5. Receive a mortgage in principle offer: If you meet the lender’s criteria, they’ll present you with a mortgage in principle! This document outlines an approximate loan amount they are willing to lend you based on the information you provided. Again, keep in mind that it’s not a binding agreement, but serves as an initial indication of their decision.

Three key differences between AIP and mortgage application process:

• Property-specific details: When applying for a mortgage in principle, you don't need to provide specific details about the property you intend to purchase. The lender assesses your eligibility and borrowing capacity based on general information. With a formal application, the lender will value the property you want to buy to make sure there are no discrepancies. They’ll need to re-sell the property if you’re unable to keep up mortgage payments.
• Comprehensive underwriting: A mortgage in principle is typically a preliminary assessment, whereas a full mortgage application involves a more detailed underwriting process. The lender will verify documentation about the property you want to buy, and may request additional information.
• Hard credit check: A full mortgage application process involves a hard credit check against your credit file, which leaves a footprint that other lenders can see. A mortgage in principle application process, on the other hand, does not involve a hard check.

How reliable is a mortgage in principle?

Although receiving a mortgage in principle is a positive sign, it’s not a binding contract. Lenders can still refuse your application even if you have a mortgage in principle, especially if there are issues like a county court judgement on your credit file. That’s why it’s essential to take proactive steps to ensure your financial readiness.

Does a mortgage in principle affect your credit score?

No, taking out a mortgage in principle does not have an impact on your credit file, but a real application does.

When you take out an AIP, the mortgage lender carries out a soft search on your credit history. As the name would suggest, a soft search isn't extensive. When you submit a real mortgage application, you get a hard search - a thorough search that could find things left unaccounted for.

Hard checks leave a footprint on your credit rating, indicating to other lenders that you've attempted to take out a loan. Multiple hard searches can give lenders the impression that you're a bad borrower, having gone through an application process multiple times.

Changes to your credit rating can impact your chances of receiving a mortgage offer, even after an agreement in principle.

Is an AIP beneficial for the mortgage application process?

Yes! An agreement in principle is an important precursor to the formal mortgage application. Here’s why:

• It’s a trial run which means there’s room to learn: During the agreement in principle stage, mortgage lenders conduct a credit search and assess your financial situation. If any issues arise, such as problems with your credit history or affordability, they can be addressed early on, allowing you to take appropriate steps to improve your chances of securing a mortgage.
• Gain confidence in your borrowing capacity: Having an AIP gives you a clearer understanding of the amount you can potentially borrow, helping you set realistic expectations when searching for a property.
• Leads to a faster mortgage application process: Once you’ve found a house you like and you make an offer, having a mortgage in principle allows you to move forward quickly with your formal mortgage application. It streamlines the process since much of the initial assessment has already been done.

Does having a mortgage in principle mean my mortgage application will be accepted?

Having an AIP does not mean your application will be automatically accepted by the lender. More than one mortgage application has been rejected at the last hurdle because of this assumption.

Having an AIP can be beneficial during your property search as it provides a preliminary idea of your budget and demonstrates seriousness to sellers and estate agents.

Formal applications go through more thorough investigations than mortgages in principle. Make sure you receive a formal mortgage offer by doing the following:

1. Speak to a mortgage broker before pursuing an AIP

Mortgage brokers are trained to locate the best deals for a borrower's specific circumstances. They can help you find a lender that's more likely to give you an AIP and a mortgage offer.

2. Make sure your financial situation matches the information provided in the AIP

During mortgage applications, lenders perform a hard search on your credit file. If there are any inconsistencies between the information you initially provided and your actual financial situation, it could lead to potential rejection of your full application.

3. Follow your lender's mortgage guidelines

Banks and building societies have different restrictions when it comes to offering mortgages. For instance, some lenders may not allow borrowing against new build properties, while others may have restrictions on flats located above commercial premises. These types of properties are often considered higher risk investments, even if they fall within the lender's approved loan amount.

For more information, please read 'How to get approved for a mortgage'.

How long does a mortgage in principle last?

A mortgage in principle typically lasts 60 to 90 days, but validity terms vary from lender to lender. Theoretically, you should have enough time after receiving an AIP to successfully place an offer on a property and have it accepted. If your AIP does run out, you'll have to go through the process again to get another.

Summary: Don't rest on your laurels!

Getting a mortgage in principle is an important step when buying a house, but it has its limitations. While an AIP provides an indication of your borrowing capacity, it's not a binding contract, and lenders can still reject your application.

This should not diminish an agreement in principle’s importance however. It can allow you to address any issues early on, gain confidence in your borrowing capacity, and streamline the formal mortgage application process.

If you’re thinking about applying for an AIP, don’t forget to consult with a mortgage broker, ensure your financial situation matches the information provided, and follow your lender's guidelines. Happy house hunting!