An ‘agreement’ or ‘mortgage in principle' is a handy document which could give you the edge when house hunting. But it may not be all that it seems… Sonya Matharu and Gemma Bennett of The Mortgage Mum explain what these agreements are and what they are not
Sonya kicks off by offering a definition of an Agreement in Principle and why it’s useful…
An Agreement in Principle – also known as a Decision in Principle and Mortgage in Principle – is one of the first steps to obtaining a mortgage.
It is, essentially, a document provided by a lender which indicates how much they may be willing to lend you based on an initial assessment of your financial situation.
Once you’ve obtained an Agreement in Principle (AIP), you have proof that a lender is willing to consider a full application from you.
Why do you need an Agreement in Principle?
Having an AIP means you have approval to apply for a mortgage. So, when you’re looking for your dream property, you can show estate agents that you’re a serious buyer because you have documentation which demonstrates you’ll likely – pending verification of your financial documents and further assessment from the lender – be able to afford the property.
You’ll be taken seriously as a buyer and this assists estate agents in putting forward the right candidates to the seller to avoid wasting time. This can particularly helpful when a seller is deciding between more than one buyer.
If you’re looking to obtain an AIP, it’s best to speak with a mortgage broker as they can identify the best way to navigate this for you – after all, you do not want to create too many searches on your credit report* by obtaining multiple AIPs.
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*Sonya’s Quick Guide: What is a ‘footprint’ with regards to credit checks?
A soft credit check is an initial look at certain information on your credit report.
Companies perform soft searches to decide how successful your application would be without conducting a full examination of your credit history – this leaves a soft footprint which is only visible to you.
A hard credit check happens when a company makes a complete search of your credit report – this leaves a hard footprint which is visible to any other company searching your report.
Too many hard footprints can negatively affect your credit score as these checks show you have applied for credit so could signal to lenders that you may be a higher risk.
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Agreements in Principle: What to watch out for…
There can sometimes be confusion surrounding Agreements in Principle and how they can be used. Gemma explains what an Agreement in Principle is not…
Don’t confuse an AIP with a mortgage offer
An Agreement in Principle is not a mortgage offer.
To get an official mortgage offer your application will need to go through more detailed analysis – a process called underwriting – to assess the accompanying documents. In addition, a mortgage valuation will be carried out on the property by the lender.
You often have an AIP before you’ve even found a property and so although your circumstances and requests have been agreed in ‘principle’ it is always subject to assessment of the property to be mortgaged.
A lender will carry out a mortgage valuation prior to issuing an offer. This is usually done as a physical visit and inspection of the property by a qualified surveyor who issues a report for the lender. Other times, particularly when the loan to value is low, the lender can perform a digital valuation of the property without physically visiting it.
Either way this valuation survey is purely for the lender and is not to be confused with a homebuyers survey, which is highly recommended when purchasing a property and is instructed by the buyers and for the benefit of the buyers.
You aren’t tied to an Agreement in Principle
Another thing to note about an AIP is that you are in no way bound to that lender or product. The market changes regularly and when it comes to you finding a property and having your offer accepted, it may be that a more favourable product and even lender is better for you at the time of full mortgage application.
A broker can assess this and look at your best options at this time as there’s no obligation to apply with the lender with whom you have your AIP.
Your broker will know how best to negotiate any footprints on your credit report as mentioned above to ensure you’re in the best position at application.
Make sure your Agreement in Principle is effective
Lastly, but very importantly, make sure your AIP is worth the paper it’s written on..
If you’ve acquired it yourself or an adviser has generated you one without asking for a certain amount of documentation first, it’s quite possible you’ll be vulnerable to unexpected changes when it comes to full application and underwriting.
A broker can assess your documents fully before applying for an AIP and this way you’ll know the amount of loan agreed in principle is as accurate as possible.
This is because brokers understand how the lender calculates various incomes which may show up on payslips and how this lender will assess any other quirks in your circumstances. Therefore, they can match and input your details appropriately.
In a nutshell: Why are Agreements in Principle such a good idea?
It can be very stressful and disappointing to find a property thinking you are able to borrow one amount, only to find that – upon cross-checking of the documentation – you can actually borrow a bit less.
This is particularly frustrating if it could have been avoided by diligent prep work.
It can take a while to find a property, but once your offer has been agreed, everything speeds up. Agents like to feel confident about your position as a buyer, so good prep gives you the edge and helps you feel most secure in your position.
I really hope this has helped you understand exactly what an AIP is, why it’s useful and what it isn’t.
If you’re embarking on your property search, make sure you have one and remember my favourite saying when it comes to property hunting ‘what’s right for me won’t pass me by!’.
Keep your position strong and when it’s right it’ll fall into place.
Gemma Bennett and Sonya Matharu are both senior mortgage brokers for The Mortgage Mum
You can find out more about Sonya and Gemma, their jobs and how they help people with their mortgage journey here.
