Agreement in Principle

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Agreement in Principle (Part 1)

Sam Hubbard explains how an Agreement in Principle works.

What is an Agreement in Principle (AIP)?

An Agreement in Principle is effectively a conditional offer from a mortgage lender. It states generally how much they might be willing to lend to an individual or a couple. It’s not a formal mortgage offer – it’s a preliminary assessment of an individual’s financial situation.

You’ll often hear it being referred to by other names, like Decision in Principle (DIP) or Mortgage Promise, or Mortgage in Principle. They are essentially the same thing – a document showing that a lender has reviewed basic financial information and in principle will lend you a certain amount of money.

It’s a key document to have when you start seriously viewing properties.

What should I do if my estate agent is asking to see my Agreement in Principle? How do I get one?

It’s very common for estate agents to ask to see an AIP. They’re doing this to ensure that any offers are from serious and financially viable buyers.

It’s the estate agent’s way of vetting potential buyers and reassuring sellers that any offer coming in is legitimate. It’s best to get prepared so you can show an estate agent your Agreement in Principle when they ask.

To get one, you provide a mortgage lender or a broker with some basic information about your finances – your income, your outgoings, any existing debts and what deposit you have.

You can then get an AIP quickly and effectively.

We’d obviously recommend talking to a broker. It’s all about getting all your house in order to provide lenders with information and move things forward.

Do I have to have an Agreement in Principle through the estate agent I’m looking to purchase through?

You might possibly have seen a TV programme a few months back highlighting the practices of a well-known estate agency. The term used within the programme is ‘conditional selling’ – and that’s not allowed.

Buyers are under no obligation to get their AIP through the estate agent they’re viewing properties through. We’d always recommend speaking with an independent broker like ourselves to get you the most suitable deal.

Estate agents will have in-house mortgage advisors, which they recommend, but you have the right to choose your own lender or broker to get your Agreement in Principle in place.

How reliable is an Agreement in Principle?

An AIP is a good indication of what can be borrowed, but it’s not a guarantee. The Agreement in Principle is based on information provided – but when you submit a full mortgage application, you provide all the corroborating documentation for lenders to assess.

At the point of an AIP, they haven’t seen all that. You state your earnings and outgoings, but the lender hasn’t seen the documents. But it is reliable as long as all the information put in is absolutely accurate.

We’d always recommend getting it done professionally, because we know how to structure that for the lender and make sure that all necessary information is included – otherwise the AIP becomes worthless.

If it’s done accurately, nine times out of 10 it will go through to a positive application.

How long does an Agreement in Principle last?

It’s very variable depending on the lender – they vary from 30 to 90 days. But you shouldn’t worry about that. Get an Agreement in Principle done – they generally use a soft footprint on a credit file so they’re not causing any detriment. They can always be refreshed if they expire.

Can I make an offer with an Agreement in Principle?

Yes, and you should. An estate agent will generally take your offer much more seriously if you can back it up with a valid AIP. It demonstrates to both the estate agents and the sellers that you’re serious and a credible buyer. It shows you’ve done your homework and got your finances reviewed and ready.

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Does an Agreement in Principle mean you’ll get a mortgage?

No, an AIP is not a guarantee of a mortgage. It’s a conditional offer based on the preliminary information. A final mortgage offer is contingent on several factors, which include a full credit check.

The lender will want to see a detailed credit history at the application stage. They will verify your income and employment via your payslips, bank statements and other documents they may require.

The lender will also need to be sure the property is worth what you’re paying for via a valuation, confirming it’s adequate security for their loan.

They’ll carry out affordability checks, with a full assessment of income and outgoings to ensure the payments are affordable. So a lot more happens after the AIP to support the application.

Will I need a credit check? Does an Agreement in Principle affect credit score?

To get an AIP, the lender will perform a credit check, but typically it is a soft footprint. That doesn’t cause any major detriment to a credit file. This type of check doesn’t leave a visible mark on your credit report that other lenders can see.

If you’re getting an AIP done, always ask if it’s going to be a hard or soft check. Your broker should tell you. A hard check will leave a visible footprint on your credit report, and too many hard checks in a short period can potentially lower or damage your credit score.

How do I apply for an Agreement in Principle?

Applying for an AIP is a relatively straightforward process. I’d advocate using a broker, because we give you access to a wider range of lenders.

With an AIP, you need to get your house in order. You provide details like your name, date of birth, current address and detailed information about your income. For example – how much is your basic pay, how much of that is overtime, do you get regular commission?

It’s important to have those details to hand so that they’re accurate. We also need details of any debts you have, any credit or credit card balances, loans, HP and how much you’re paying per month.

The amount of deposit you’ve saved is really important. The more deposit, the lower the Loan to Value, the lower the lender’s risk and therefore the more likely you are to be accepted.

As a broker, we know what lenders are looking for, and if you’re trying to do an Agreement in Principle yourself, you may omit telling the lender certain things – not deliberately, but because you’re not sure what they’re looking for.

A professional broker firm will assess the documents professionally, look at exactly what the lender requires and make sure the data is correct to get the right outcome for you.

How long does it take to get an Agreement in Principle?

As an example, we spoke to somebody this week who’d had an offer accepted on a property. They uploaded their documents the same day, we assessed them and researched lenders, and we got the Agreement in Principle literally within five or six hours.

If we get ourselves organised, it can be done very quickly.

What else do we need to know about getting an Agreement in Principle?

Just remember that brokers can be incredibly helpful throughout this process.

We know which lenders are going to conduct a soft credit search and those that do a hard search. The bottom line is to work with people that can point you in the right direction and save you an awful lot of time and effort.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.