Mortgage Agreement in Principle Explained
If you’re getting a mortgage to buy a new home, this guide will help you make the best decision when it comes to your mortgage in principle – find out more about your first mortgage step below.
What is a mortgage in principle?
A mortgage in principle, also known as an agreement in principle, is a provisional decision as to whether a lender would give you a mortgage. The lender will make a decision based on your income, job and regular spending – but without running a full, in depth credit check.
Some lenders don’t run a credit check at all when they’re deciding a mortgage in principle – but many do some kind of search. Most lenders will use a soft search, but a few lenders may leave a mark on your file, so make sure you only get one mortgage in principle at a time.
Essentially, a mortgage in principle is the bank confirming whether or not they’d consider you for a mortgage. It doesn’t guarantee they will give you the mortgage in the end, it simply means on paper, it looks like you could afford the payments, and they would let you apply.
Do you need a mortgage in principle?
You need a mortgage in principle to apply for a mortgage, and to give you a good idea of the homes you can afford. It also makes you an attractive candidate to sellers, who love to see evidence that a buyer is serious and won’t pull out of the deal.
In terms of putting offers in for a home, it’s not actually a legal requirement, but most estate agents will insist you have one.
The difference between a mortgage in principle and a mortgage offer
As mentioned previously, a mortgage in principle isn’t the same as a mortgage offer. Check out the table below to get to grips with the differences between them.
|Mortgage in principle||Mortgage offer|
How to get a mortgage in principle
Once you’ve got to grips with what a mortgage in principle is – and why you need one – it’s time to think about how to actually get it.
Make yourself attractive to lenders
When you’re applying for a mortgage in principle, it’s best to take a look at your credit history and make sure you’re suitable. It can be disappointing to be accepted for a mortgage in principle, but then rejected when it comes to further checks.
Check out price comparison websites
While a mortgage in principle doesn’t guarantee you’ll be accepted, you are essentially applying for the mortgage you would like to have eventually. Compare the market and find the best deal.
Prepare your documents
To get everything in order for your application, you’ll usually need to provide the lender with:
- At least three months’ worth of payslips (or three years of filing if you’re self-employed)
- At least three months’ worth of utility bills and other forms of proof of address
- Photo ID, such as a valid driving license or passport
- Details about any existing credit agreements
Start your application
Once you’ve found the mortgage you’d like and think you might be eligible for, it’s time to submit your application. It’s a pretty easy process once you’ve gotten all your documents together, and you can usually do it yourself online. You can, of course, go into the bank to apply if you’d rather.
What to do if your mortgage is declined
Applying for a mortgage is a pretty big financial decision. It heavily depends on – and can impact – your credit history. As a general rule, when you apply for credit and it’s declined, it can have a negative impact on your score. So, what do you do when that happens?
If your mortgage in principle is declined
If your mortgage in principle is declined, then your credit score and income aren’t right for the amount you’re trying to borrow:
- Consider taking time to improve your score
- Revise how much you’re looking to borrow – you may be able to afford a smaller mortgage
- Don’t apply for another in a short period of time
If your mortgage is declined after your mortgage in principle is approved
If your mortgage is declined after your mortgage in principle is approved, your credit history is likely to be the issue:
- Work on improving your score
- Ensure there are no mistakes on your credit file
- Ensure you have no CCJs or other damaging marks
- Don’t apply for another mortgage until your score has improved
If you’ve successfully obtained your mortgage in principle – well done! But you might be left thinking, “well, what’s the next step?”
You’ve usually got around six months until your mortgage in principle expires – so that’s six months to find the right house, and then apply formally for the mortgage, going through all the required credit checks.
When you’re looking at homes, lots of estate agents will want to see proof of your mortgage in principle to ensure you’re serious about the sale, and determine how likely it will be that you can secure a mortgage to pay for it.
Will a mortgage in principle affect my credit rating?
Every lender has their own process when approving your mortgage in principle. Some lenders don’t credit check, some do soft searches, and some do hard searches – meaning it’ll show up on your file.
If your lender doesn’t do a credit check or does a soft search, it’s unlikely a mortgage in principle will affect your score. However, a lot of bigger banks and lenders do hard searches – which is advantageous as they will have a better idea of your history when it comes to your mortgage offer, but it can show up on your credit file, and too many hard searches in a short space of time will have a negative impact.
Overall, it’s unlikely a mortgage in principle will lower your score, as long as you only apply for one.
Should I get a mortgage in principle before I begin looking at homes?
It’s a good idea to get a mortgage in principle before you begin house hunting – this way you’ll know what you can afford. Estate agents also like potential buyers to have a mortgage in principle – but it’s not a requirement.
You might want to have a look at homes online to get an estimation of how much you’d ask to borrow before you apply.
What does it mean when a mortgage in principle has been referred?
If you’ve applied for a mortgage in principle and you’ve heard back that your decision has been referred, this means there’s something unusual or not quite right about your application.
This isn’t a worry though – most of the time this simply means an underwriter is going to manually review your application and make a decision. If there are any issues, they will contact you.
However, if your mortgage in principle has been referred, you’ll likely have to wait longer for a decision while it’s being reviewed. You’ll usually be notified of how long you can expect to wait to hear back.
Are mortgage in principle applications free?
Every lender is different – it’s important to check everything about a mortgage in principle lender before you apply. Some do offer free MIPs, but many do charge. Lenders can charge fees upfront and some charge back-end completion fees.
Is it better to apply online or in person?
Applying online can make the process a little less stressful for some, and most lenders allow you to save an application and continue it at a later date, if you need more time to source the required documents.
However, applying in person means you can talk through the application with someone, which will be helpful if you get stuck at any point, or don’t understand parts of the application. It can also be advantageous to apply in person if you have unusual concerns about your credit file – as automated systems may decline an application that a person might understand and consider.