An Agreement in Principle (AIP) can be a handy document to have if you are looking to buy a property.
Here, we explain what an Agreement in Principle is, why it’s important when you’re looking for a home to buy, and how to get one.
What is a Mortgage Agreement in Principle?
An Agreement in Principle is also known as a Mortgage in Principle (MIP), or a Decision in Principle (DIP).
It is a formal document, written by a bank or building society that gives an indication of how much you can borrow to purchase a property, based on your finances and personal circumstances.
Why do you need an AIP?
An AIP is useful to have because, as a potential buyer, you’ll get a clearer idea of how much you can borrow for a mortgage. This can save you time when searching for, or looking at, properties. On the one hand, you won’t be wasting time on ones that are out of reach; on the other, you’ll be able to look at ones that you might otherwise have thought you couldn’t afford.
It also reassures estate agents and sellers that you are a serious buyer who is highly likely to be able to secure a mortgage deal, and that you can afford a property. This can be very helpful, standing you in good stead, if there are lots of interested parties.
You may even find that if there is a shortage of properties for sale with too many interested buyers, estate agents won’t put your offer forward without an AIP in place.
It’s prudent to obtain an AIP before you begin house-hunting, so you’re prepared if estate agents request one.
How lenders assess your AIP application
Lenders assess your AIP application by running a credit check. They may carry out a hard search, leaving a ‘footprint’ on your file that can be seen by other lenders. If you are seen to have many of these checks in a short time span, it could negatively impact your credit score, as it could indicate to lenders that you are finding it difficult to secure a mortgage.
Generally, lenders run a soft credit check when creating an AIP. These don’t leave a footprint, and as a result your credit score won’t be affected.
Does an AIP guarantee a mortgage offer?
An AIP will not guarantee you a mortgage offer. To obtain an offer, you will need to make a full, formal mortgage application. This needs to be done once you’ve found a property you would like to purchase, and your offer has been accepted by the seller.
Whether you are using a mortgage broker or dealing with a lender direct, they’ll use the information you gave to obtain your AIP as part of the application. Though, they will want to be sure all details still stand.
Different factors could impact the outcome when making a full mortgage application. This includes changes to your personal circumstances, the interest rate or their own lending eligibility criteria.
