A Guide to Agreement in Principle 

A Guide to Agreement in Principle: An Agreement in Principle (AIP) is common when applying for any mortgage, whether you’re a seasoned home mover or a first-time buyer. It gives you an idea of how much you will be able to get from a lender and many estate agents ask that you have one in place before they even start showing you their properties. 

In essence, though by no means a firm commitment, it’s an undertaking from the mortgage lender, after they’ve done their cursory checks, that they will consider lending to you. If this sounds a little wishy-washy, AIP does come with some important benefits. 

What is an AIP?

AIP is also known as Approval in Principle, Decision in Principle, and Mortgage in Principle. It works fairly simply and can often be done online or, in some cases, over the phone. 

Online, you sign into a mortgage providers site, give them details of your finances and they provide a fairly speedy (usually within 24 hours) decision of how much they are likely to lend if you meet the criteria of the final application process. 

This AIP is usually valid for 90 days and it is NOT a firm offer nor a guarantee that you will be accepted for a loan – in short, you will still have to go through the full mortgage application process like everyone else. 

There are a couple of reasons why this is beneficial to first-time buyers or anyone else looking to purchase a property. First of all, it confirms that you can afford to buy a property which means estate agents and vendors will pay attention to you. Secondly, it shows how much you are likely to be loaned and that can help narrow down and focus your house hunting. 

Does the Lender Check Your Credit History?

The short answer is yes. While it’s not the only thing that can influence whether a lender decides to accept you through an AIP, it’s a fairly simple way to check out your financial security. Credit history checks are easily done online and many mortgage lenders link into systems like Experian, TransUnion and Equifax. 

If you have issues such as default payments on loans or utility bills, payment delays or county court judgements (CCJs) these may act as a red flag for lenders, particularly banks and building societies. 

For this reason, we advise anyone who is planning to get an AIP and is starting on their house-hunting endeavours, to check their credit files first. Ensure this is in as good a health as possible and everything detailed in your report is factually correct. 

Soft Check vs a Hard Check

One thing you will need to be aware of when it comes to credit checks is that mortgage lenders will have different processes. Some will do a more rudimentary or soft credit check, others will go much deeper. The good thing about a soft check is that, if you are declined, it doesn’t go on your credit record for other lenders to see. 

Even if a lender does a soft check at first, however, they will do a hard search later on when you are applying for the mortgage. 

How Your Credit Affects the Outcome of the AIP

When a lender does a check of your credit file they’re essentially looking for indications that you’re likely to be a ‘safe bet’. As with any lender, they will want to maximise all the potential that you’ll pay every month and won’t run into problems further down the line. 

Credit issues that can affect their decision will include whether you have missed payments recently or even defaulted on loans or had a county court judgement against you. 

Even if you have a good credit rating, however, it doesn’t guarantee that you will be offered an AIP and then be able to apply for a mortgage when you find your ideal home. You need to also take into account the lender’s internal check – essentially their rules and regulations for accepting or declining you as a customer. 

What Internal Checks Do Lenders Make for an AIP? 

When you apply for an AIP, you will be asked a series of questions by your potential mortgage lender. These are designed to get further basic information including: 

• Details of your income and the income of anyone else applying. 
• Details of your regular incomings and outgoings. 
• Details of your addresses over the last 3 years. 
• The size of your deposit.

This information is used to create a score along with your credit rating or status. This will determine whether the company is prepared, at least in principle, to lend to you and how much they are willing to give. 

Some things that can affect how they score your application include your current level of debt and how you pay those debts and your debt-to-income ratio. Issues that could raise red flags for lenders is if you have debt that is eating into your income along with your outgoings (bills such as utilities and subscriptions). 

Debt-to-income ratio is particularly important. It’s all your monthly debts divided by your income – if the value is too high it can automatically mean that your application is refused. 

One thing that can make it more likely for you to get a favourable AIP decision is if you have a sizeable deposit already. 

How do Lenders Create AIP’s?

You won’t be surprised to learn that most AIP decisions nowadays are automated. You can generally go onto the lender’s website, fill in their form and answer the various questions and the decision will be given within 24 hours. Many nowadays give a response within about 15 minutes. 

If there is a significant problem with your application because of debt issues, for example, you may not get an immediate response. 

I Had an AIP From a Lender but My Mortgage Application Was Declined

An Agreement in Principle is not set in stone and does not commit the mortgage lender to accept you once you go through the full application process. Several issues can send a lender cold and lead them to refuse you at the application stage. These include:

• You recently changed jobs – this could mean your income has changed or that the lender is worried about you losing the job soon. 
• There has been a significant change in outgoings or the money coming in, including once you have taken on extra debt. 
• The details on your formal application for a mortgage do not match the information you initially provided for the AIP. 
• A deeper credit check finds previous issues with repaying debts or an ongoing association with a partner or former spouse who has financial difficulties. 
• There may be other lender-specific criteria – this can be as varied as your marital status to the company’s credit to income ratio. 

Because there are different checks for the AIP and your formal mortgage application, it’s important to make sure that you meet the lender’s criteria. Most do a good job of providing potential mortgagees with the information they are looking for. Working with a mortgage broker who understands the ins and outs of each company can also make a big difference and save a lot of time. 

Can First-Time Buyers Get an AIP?

The short answer is yes. It’s probably more valuable to first-time buyers than anyone else. Other buyers will already have a mortgage and track record behind them. 

As a first-time buyer, you’re not relying on using profits from your last home sale to make up for any differences, you’ll be getting a brand new mortgage (minus any deposit you might need). Certainly, if you are approaching an estate agent they will want you to have one in place. 

Should I Get More Than One AIP From Different Lenders?

There’s no reason why you should not be able to do this but it’s not advisable. It can give you an idea of the scope of what lenders are likely to give you. However, if you apply to a lender for an AIP and they use a hard search system, it can go on your credit rating if they decline you. Most people settle on getting an AIP from one lender to give them an idea of what they can borrow and satisfy their estate agent. 

Getting an AIP from one lender doesn’t then stop you from applying to other lenders once you have found the house that you want to buy. 

The Benefits of Working with a Mortgage Broker

Particularly for first-time buyers, the world of AIPs and mortgages can be challenging and even confusing. Many make the mistake of going full-steam ahead rather than doing their research beforehand in individual lenders. That’s why it’s often useful to go through a mortgage broker that understands the landscape and can help you make the right decisions and focus on the most appropriate lenders for your situation. 

At Sterling Capital Group, we have access to thousands of mortgage products and a wealth of experience both with first-time buyers and established homeowners. 

Contact us today to find out more.

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