Getting approved for a mortgage is a major milestone in the home-buying process. However, before you receive a full mortgage offer, you’ll likely come across the term approved in principle. This step is essential for any prospective buyer, especially those looking to gain a competitive edge when viewing properties.
A mortgage agreement in principle helps buyers understand what they can afford, offering them confidence and flexibility when searching for their dream home. Let’s explore how a mortgage agreement in principle works and why it’s an important part of your path to owning a home.
What is a mortgage agreement in principle?
A mortgage agreement in principle (AIP), also known as a Decision in Principle (DIP), is a lender’s initial estimation of how much you may be able to borrow. This figure is based on basic financial checks, including your income, outgoings and credit score. While an AIP gives you a good indication of your borrowing power, it’s important to remember that this is not a formal mortgage offer. Instead, it’s an early-stage assessment that can help guide your property search.
Lenders use this information to assess whether you meet their criteria, giving you peace of mind that you’re looking at properties within your budget. However, before a formal offer is made, the lender will perform more detailed checks to confirm your ability to repay the mortgage.
Why apply for a mortgage in principle?
A mortgage agreement in principle offers several clear benefits, particularly for buyers who are serious about making a property purchase:
- Clarity on borrowing power: It provides a clear understanding of how much you can borrow, helping you search for homes within your budget.
- Strengthens your position with sellers: Having an AIP shows estate agents and sellers that you’re financially prepared and committed, which can give you an edge over other buyers.
- Speeds up the mortgage process: With an AIP in hand, your full mortgage application will be faster, as some of the initial checks are already done.
Obtaining a mortgage in principle helps streamline the buying process, giving you confidence and showing your seriousness to sellers and estate agents.
What’s the difference between a mortgage in principle and an offer?
A mortgage in principle is a preliminary approval, giving you an idea of how much you could borrow, whereas a full mortgage offer is a binding commitment from a lender. The decision in principle is based on a basic assessment of your financial situation. A formal mortgage offer comes after a more thorough check of your finances, including a property valuation and a deeper exploration of your ability to repay the loan.
The key difference is that while an AIP helps you understand your affordability, it does not guarantee that a lender will offer you a mortgage. The formal mortgage offer is legally binding, ensuring you have the funds required to purchase the property.
When should you get a mortgage in principle?
It’s a good idea to get a mortgage agreement in principle before you start seriously looking at properties. An AIP guides you, so you only explore homes that fit your budget and show sellers that you’re a committed buyer.
Will it affect your credit?
When applying for a mortgage in principle, a lender will run a credit check. This can either be a soft or hard search:
- Soft credit check: This type of check does not leave a visible footprint on your credit report and has no impact on your credit score. Many lenders use soft checks for AIPs.
- Hard credit check: Some lenders may opt for a hard credit search, which leaves a mark on your credit report and could impact your score. While this is temporary, multiple hard checks in a short period can reduce your credit score.
It’s always worth checking with the lender to confirm whether they use a soft or hard search, especially if you’re considering applying with multiple lenders. A good credit score is essential for securing a mortgage, so you don’t want to have a large number of hard searches in a short period.
The steps for applying for a mortgage in principle
Applying for a mortgage agreement in principle is straightforward, following these simple steps:
- Choose a lender or broker – whether you go directly to a lender or use a mortgage broker, take time to choose one that fits your needs.
- Submit your financial details – you’ll need to provide information about your income, outgoings and credit history.
- Undergo a credit check – depending on the lender, this could be either a soft or hard credit search.
- Receive your AIP – if successful, you’ll receive an agreement in principle that outlines how much you may be able to borrow.
Can you get multiple mortgage agreements in principle?
It’s possible to apply for multiple mortgage agreements in principle if you’re comparing lenders. However, keep in mind that if hard credit checks are involved, this could temporarily lower your credit score. To avoid this, try to work with lenders that offer soft credit searches.
How long does a mortgage in principle last?
Most mortgage agreements in principle are valid for 60 to 90 days, though this can vary depending on the lender. If your AIP expires before you find a property, you can reapply, but this may involve another credit check.
Keeping track of when your AIP expires is important, especially if you’re actively searching for a home. Should you need to renew, the process is usually quick and painless, but it’s best to ensure your AIP remains valid during your property search.
Kickstart the home buying process with an agreement in principle
A mortgage agreement in principle is a valuable first step for any homebuyer. It offers clarity on your borrowing power, speeds up the home-buying process, and positions you as a serious buyer in the eyes of potential lenders. While an AIP is not a guaranteed mortgage, it positions you well for the next stage of the home buying process.
To take that first step towards owning your first home get in touch with one of our reliable Pepper Money broker partners today.