Mortgage Agreement in Principle
Buying a home is not as simple as buying a new toaster or deciding where to get your takeaway. It is a complex process, and if you’re like most people in the market for a house, you require a mortgage to finance the purchase. The first step is getting a sense of what you may be able to borrow (use an easy online mortgage calculator). The second is obtaining a mortgage agreement in principle. What is it – and where do you go from there?
What Is a Mortgage Agreement in Principle?
Ready for yet more real property acronyms? A mortgage agreement in principle may be referred to as an AIP, a Decision in Principle (DIP) or Mortgage in Principle (MIP). Regardless, it is a document from a lender that states how much they would lend you if you were to buy a home.
This is important because it gives you a clear indication of how much house you can afford, saving you time and helping you zero in on properties that will be best suited for you. Further, most sellers will not give you the time of day if you do not have an AIP. It indicates that you are serious and that you will (most likely) have the funding necessary to complete a purchase.
We qualified that by saying most likely. An AIP is not a formal mortgage offer. Rather, it is an estimate of what you could borrow. When you make an offer and it is accepted, you will have to apply for a mortgage. It should likely go through smoothly but if you have had a change in your financial circumstances, the lender can back out. This is why it’s an agreement in principle.
How Do You Get an AIP?
There are a few different ways to get a mortgage agreement in principle: you can apply online, over the phone or visit a bank or building society branch. You should be prepared to provide information regarding your income, your monthly expenditures, any debts you are carrying and how much you would like to borrow.
The lender checks your credit file to assess your financial state and to determine if they would lend to you and, if so, how much.
Some FAQs about the AIP application process:
Q: Am I Eligible for an AIP?
A: While criteria may differ slightly from lender to lender, you will need to show proof of regular income that you expect to continue, a work history going back at least three months and up to date payment history on loans and credit accounts. As well, you must be planning to buy a home in the UK in which you will reside, be aged 18 or older with the right to live in the UK permanently and have at least a 2 years’ address history in the UK.
Q: How Long Does It Take?
A: If you apply online, you can get an AIP in just minutes. If your financial situation in terms of income and outgoing expenses is more complex, it may take a little longer. Likewise, if you apply by phone or in person, it can take longer.
Q: Will This Affect My Credit Rating?
A: No, applying for or getting an AIP does not affect your credit rating nor your ability to apply for credit elsewhere. The lender will do a ‘soft’ credit check which does not impact your credit score. If they need to run a full or ‘hard’ check, they should ask your permission in advance.
Q: Am I Obligated to Get a Mortgage When I Get an AIP?
A: When you apply for an AIP, you are not committing to a particular type of mortgage or a particular lender. By the same token, the bank is not guaranteeing you a mortgage even when your AIP is approved. So, no obligations on either side at this point.
Q: If My Application Is Accepted, How Long Does an AIP Last?
A: Your mortgage agreement in principle is generally good for up to 90 days.
What’s next? If you make an offer that is accepted, apply for a full mortgage. You are not obligated to choose the lender who issued the AIP. The lender is also not obligated to give you the amount quoted in the AIP; to determine how much they are willing to lend, they will conduct a more thorough credit and financial check.
Buying a house is a big step… with myriad little steps! Getting an AIP is one of the first and most important at this stage.