Agreement in Principle
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Agreement in Principle (Part 1)
Oliver Potter explains how an Agreement in Principle works.
What is an Agreement in Principle?
It comes under many names – Mortgage in Principle, Decision in Principle, AIP, DIP, MIP… they’re all exactly the same, it’s just different terminology.
An Agreement in Principle is basically an indication of whether the lender will approve you once we come to submit a full application. They’re saying that if your income is verified at a certain amount and your credit is OK, they will give you approval.
It gives us a good picture ahead of making anything official. It’s very important and every case needs one.
What should I do if my estate agent is asking to see my Agreement in Principle? How do I get one?
Estate agents may want this at different stages. As a company, we take an ad hoc approach, depending on your situation.
Some estate agents want you to have an Agreement in Principle before you even view properties. But the majority only need it once you’ve made an offer on a property.
An Agreement in Principle won’t convey much information about your income or credit. They usually just say that the bank will let you borrow a set amount of money. Some people redact them, but I wouldn’t be too worried. The estate agent’s got to see some proof of your income anyway.
We always try to have a conversation with the estate agent. Some want to see an Agreement in Principle and others want to hear it verbally from us. But you should never feel pressured by them.
They might encourage you to send an Agreement in Principle, but it’s completely benign and fine to send it. Feel free to check with us if you’re unsure – we’ll give you an honest opinion.
Do I have to have an Agreement in Principle through the estate agent I’m looking to purchase with?
Definitely not. This is very common but it’s not a nice practice. A client makes an offer on a house and the estate agent is very pushy about them speaking to their in-house broker to verify affordability or credit.
It’s a fearmongering tactic, and it shouldn’t affect your ability to purchase the house. If they say they will withhold an offer on a property, that’s not allowed – they can’t do that.
I usually speak to most people before they make an offer, anyway. The initial conversation is really quick – just 10-15 minutes on the phone. We’ll run through what you want to achieve, your income, credit, deposit… nothing too intense.
I usually summarise the conversation in an email, to confirm you can go and make offers within a certain price range. Once you find a property, you would send across documents like a passport, proof of address, proof of income – we let you know what to send.
It takes no more than 10 or 15 minutes to produce an Agreement in Principle, although it can be longer, depending on the lender. But if you want it that day, you can have it.
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How reliable is an Agreement in Principle?
It’s pretty reliable. An Agreement in Principle checks two main things. First is your affordability, by running your income through the calculator and working out your Loan to Value – in other words, how much you’re borrowing compared to how much the house is worth.
The second thing is a soft credit check. It makes sure there’s nothing outside of the lender’s policy or criteria and you’ve got an adequate score. Once an AIP is accepted, the only thing that makes a case fall outside criteria is the property. Sometimes valuations are the thing that cases fall down on. Not often, but it can happen.
Very rarely does anything ever come back on credit, because once the Decision in Principle is done, that’s pretty much signed off. It could be that they look more closely at income, but I like to think I’m pretty good at knowing what to look for – so that should be absolutely fine.
95% of the time it’s to do with the property, but that’s still rare.
How long does an AIP last?
Typically between 30 and 90 days, depending on the lender. But if it expires, you can have another one the same day. So don’t be too concerned about expiry.
Can I make an offer with an Agreement in Principle?
Yes. The majority of estate agents require an Agreement in Principle at offer stage. They want to make sure that the affordability is okay, and it also shows commitment.
If you make an offer loosely, saying you think you can afford it but you’re not too sure, that doesn’t set the tone they’re looking for. An Agreement in Principle shows seriousness and commitment to the offer.
Some estate agents might accept an offer without an Agreement in Principle, but they’ll always want one to confirm it. So make sure you get one either before the offer, or just after.
Does an AIP mean you’ll get a mortgage?
An Agreement in Principle doesn’t guarantee a mortgage, but it’s a pretty good indicator. The only thing an Agreement in Principle can’t predict is the property type.
We might have someone who passes credit and affordability checks, but then decides to buy a flat above a restaurant. The Agreement in Principle is fine, but it might potentially fall down at valuation stage, depending on the lender. But I’d say you can be around 95% confident of getting a mortgage.
Will I need a credit check? Does an Agreement in Principle affect credit score?
There’s a common myth that any Decision in Principle can reduce your credit score. But it shouldn’t affect things too much, if at all.
Most Agreements in Principle are a soft check. They’re not going to make much impact. A few lenders do hard checks, but the high street at least run soft checks. Hard checks have been phased out by a lot of lenders.
If we were to do a Decision in Principle and it declines, I’ll always be mindful of that. We wouldn’t go on to do 10 more DIPs – that’s not ideal. We’ll always have a chat and discuss the best route.
How do I apply for an AIP and how long does this take?
In terms of the process, on our initial call I’ll cover the context of what’s involved and ask about what you’re trying to do. Then I just need some documents – ID, proof of address, proof of income, potentially a credit report, and maybe proof of external incomes like maintenance, pensions or benefits.
Then I’ll produce the Agreement in Principle. What usually happens next is that once your offer’s been accepted, we’ll have another phone call and run through the next steps and mortgage costings.
How can a mortgage broker help? Is there anything else to add?
Estate agents are employed to provide the best service for their client – the vendor, who’s selling the house. They don’t work for you as the buyer. So it’s good to have someone in your corner.
If you’re thinking of buying or you’ve made an offer, have a chat. Just make sure that where you stand is where you want to be.
Key Takeaways:
- An Agreement in Principle (AIP), also known as a Mortgage in Principle (MIP) or Decision in Principle (DIP), is a non-binding indication that a lender will likely approve your full mortgage application based on a review of your income and credit.
- Most AIPs use a soft credit check and should not significantly affect your credit score.
- AIPs are around 95% reliable, but a mortgage is not guaranteed; failure is most commonly due to the property or its valuation.
- You should never feel pressured by estate agents to use their in-house broker for an AIP, as this tactic should not affect your house purchase.
- A mortgage broker is helpful as someone ‘in your corner’, unlike estate agents who work for the vendor.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.