What is a mortgage in principle and how long does it last?
Updated 19 March 2020
A mortgage in principle is an official estimate from a lender of how much you can afford to borrow on a mortgage. It can be a very useful thing to have when hunting for a first home (or second property), as it shows the estate agent that you’re a serious buyer and that any offer you make is a realistic one.
Here you can find out more about what a mortgage in principle involves, and how to use one to your best advantage.
What is a mortgage in principle?
A mortgage in principle – also called an agreement in principle (AIP) or decision in principle (DIP) – is a written indication from a bank or building society (the lender) stating how much it might be prepared to lend you. It’s not binding (they could still refuse you a mortgage on those terms) but it’s a very useful indicator of what you can probably borrow, and estate agents take them seriously.
Why apply for a mortgage in principle?
You may be wondering why you might go for a mortgage in principle first, rather than just go ahead and apply for an actual mortgage. The simple answer is that it’s quicker and less effort to get a mortgage in principle. You can often get one sorted in under an hour if there are no hitches, and at most it should take only a few days. This frees you up to go house-hunting in earnest, putting you in a position to make a firm offer on a home you like the look of.
Do I need a mortgage in principle?
Having a mortgage in principle isn’t compulsory, but there are several good reasons for getting one done.
- A mortgage in principle gives you a clear idea of what you can afford, so you know your potential buying power and also your limits. Sometimes you can afford a better home than you think, while sometimes your ambitions will need scaling back a bit.
- Some estate agents and/or sellers will only take your offer seriously if you have a mortgage in principle. This is especially the case if you’re buying in Scotland. Sometimes you won’t even get a viewing unless you have a mortgage in principle.
- By showing you what you can realistically expect to borrow, a mortgage in principle reduces the risk that you’ll apply for a too-big mortgage and be rejected. A mortgage rejection is a bad thing to have on your credit file, as it can make your next mortgage application even harder. A mortgage in principle application gives you a ‘dry run’ with less risk attached.
When should I get a mortgage in principle?
As soon as you’ve made up your mind to start home-hunting seriously, apply for a mortgage in principle. Aside from its practical uses, this will help you to focus on your task and commit to it. Knowing what you can afford, even just in theory, delivers a huge confidence boost.
Having a mortgage in principle can also save time in the buying process, both in terms of getting your offer accepted and also speeding up the mortgage application process.
Some lenders will give you a certificate when they offer a mortgage in principle, which can be useful to show to estate agents. What this includes differs by lender, but could be a) a statement they’re willing to lend the amount applied for b) the maximum sum they may be willing to lend, or c) simply a statement that your mortgage in principle application has been accepted.
Will applying for a mortgage in principle affect my credit rating?
A mortgage in principle requires a credit check. This will be done via either a soft or a hard search on your credit file depending on the lender.
A soft search simply checks against your file without leaving a ‘footprint’. As this check won’t be visible to other lenders, it shouldn’t affect your credit file.
A hard search shows on your file as an application for credit. While the hard search itself shouldn’t affect your credit rating, if a lot of hard searches are made on your file within a short space of time, lenders looking at your credit history later for your full mortgage application may think you’ve been rejected for credit several times and choose not to lend to you.
It’s worth finding out which lenders do soft searches and which use hard searches beforehand.
Remember, it’s good practice to regularly check your credit file anyway, whether you’re planning a big purchase or not. It’ll give you time to sort any problems or to add a note to your file if something from your financial past could affect it.
How to get a mortgage in principle
You can apply for a mortgage in principle
• directly from a lender (bank or building society)
• through a mortgage broker.
It’s generally better to use a mortgage broker, since he or she will have access to a greater range of mortgage than you can find on the high street or online. You can also save time this way, since your broker can find you the best potential mortgage deal straight away. This means that as soon as your offer is accepted you can just call up your broker and ask them to proceed with the full application – instead of perhaps having to shop around some more.
How much does a mortgage in principle cost?
There usually won’t be any charge from either a lender or a broker for a mortgage in principle. Usually a mortgage broker will only charge once your mortgage deal is secured (and sometimes not even then – find out more about how mortgage brokers charge).
What do you need to get a mortgage in principle?
Your mortgage broker or your lender will ask you several questions, covering area such as your income, spending, the type of work you do, your credit history and the size of your deposit. You’ll need the following information to hand:
• Income information (e.g. payslips and bank statements, or accounts if you’re self-employed)
• Records of your spending (e.g. credit card bills, utility bills, subscriptions)
• Any credit agreements
• Previous addresses, usually going back 3 years
You’ll need all of these for your full mortgage application anyway, so you can think of this as a dress rehearsal. It should go without saying: make sure all the information is correct, or you may face a rejection.
How reliable is a mortgage in principle?
A mortgage in principle is just what it sounds like – an indication of what a lender may, in principle, let you borrow. It remains conditional on you being able to meet the criteria for the mortgage in practice, and is not a promise or guarantee.
Mortgage in principle: what can go wrong?
You can be declined when applying for a mortgage in principle, and this can harm your credit score.
Reasons for a rejection include:
- Inadequate income
- Income perceived to be unreliable
- Your deposit is too small
- You have changed jobs too recently (or too often)
- Your spending appears too extravagant or out of control
- You have too much other debt
- Your credit score is poor
- Your application contains incomplete or incorrect information
Even if your mortgage in principle is accepted, your full mortgage application could be rejected later. For instances, if the lender only carried out a soft credit check, this may not have seen everything in your credit file. Other information may come to light in hard searches for a full mortgage application.
Nevertheless, this is a good opportunity to iron out any potential problems.
Can estate agents use a mortgage in principle to raise the price?
A property’s purchase price is only legally binding once contracts have been exchanged. This means that sellers can choose to raise their price at any time, whether they’re aware of what you can afford or not. Still, you can always haggle the price down again with the help of our home-buying tips.
Whether the maximum amount you’re able to afford is visible to the estate agent depends on the type of mortgage in principle certificate you’ve been given.
How long does a mortgage in principle last?
A mortgage in principle can last between 60 and 90 days, depending on the lender. If you haven’t found a property or had an offer accepted in that time, you may need to get another. Renewing it should be straightforward unless your circumstances (or the economy) have significantly changed.
Bear in mind that if any of the details you give when applying for the mortgage in principle change during the validity period (for example, you change jobs) you may need to check with your mortgage broker or lender to make sure that your mortgage in principle is still valid, and renew the application if necessary.
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