If you are looking to buy a property, getting an agreement in principle (AIP), also known as a mortgage in principle (MIP) or a decision in principle (DIP), is an important first step. An agreement in principle is a way of proving that you can afford to borrow enough to buy a property. However, it is important to bear in mind that this is not a firm confirmation. An agreement in principle is useful in getting you started on your search for buying a home. It is important to bear in mind that once you’ve had an offer accepted you’ll still need to officially apply for a mortgage.
We will look into what exactly an agreement in principle is and the potential pitfalls and considerations to take into account. We will look at what an AIP does, the myths associated with AIPs, and why agreements in principle are important.
An agreement in principle is the first step towards your mortgage application. Without one in place, you will not be able to place an offer on a property that you are planning on purchasing. It gives you credibility and proves that you are capable of purchasing a property.
Estate agents will require you to have an agreement in principle in order to make an offer on a property and for them to take that property off the market. Having an AIP gives you reassurance and the confidence to be able to deal with any hurdles that you may encounter on your home-buying journey. Hurdles could manifest themselves in the form of not being able to borrow enough money or adverse credit history that could impact the application negatively.
There are a couple of routes that you can take. You can either get an agreement in principle from a mortgage broker like ourselves or you can go to your bank. A bank or a building society is the first place that many homebuyers initially think of when setting out to purchase their home. However, this is not always the best route to take. They may not be able to offer you the best rate on the market. More often than not there are better products out there for you with a different lender. Furthermore, banks and building societies work to
their own guidelines and their affordability criteria might not necessarily be best suited to your current circumstances. As a result, they may not be prepared to lend you as much money as you need. They may even simply dislike the property that interests you, in which case you would be forced to look at an alternative lender.
Having access to a multitude of lenders enables a broker to compare lenders and match them with your personal situation. Thereby providing you with the most pertinent advice at our disposal. To you, this basically means the best possible rate out there in the market. We will also ensure that you are able to borrow the right amount of money that you need to purchase or invest in the property that you want, or remortgage.
As mentioned earlier, lenders work to their own guidelines and one lender may treat self-employed people more generously than employed people, for example. As your broker, we know where to look for your mortgage and understand who will look upon your circumstances favourably, or indeed unfavourably! Other areas of discrepancy in lenders’ leanings include whether a property is listed or whether it is of non-standard construction.
Recent changes of jobs and income composed of a high percentage of bonus and commission are also areas that lenders can have very different views on. As you can see, it is extremely important to get the right fit for you.
Explaining the process that we take our clients through will demonstrate what documents you will need and how long it takes to get an agreement in principle. Every brokerage and bank will have its own process of getting a mortgage in principle. Some will be quicker than others. At Momentum Mortgages, we believe in preparation and therefore our process is a lot more in-depth.
Rigorous preparation is one of our core values and therefore we make sure that we do our job meticulously and that our clients have all their ducks in a row and are not exposed to any nasty shocks during the process. By preparing in this manner we can ensure that any agreement in principle gained through us carries weight and genuinely means something.
Following an initial strategy call with you where we ascertain exactly what you are looking for and how best we can help you, we send you an email detailing all of the documents that you will need to provide.
In the main, these include the last three months’ current account bank statements; the last three months’ payslips if you are employed; two years worth of self-assessment tax calculations (SA302), and your tax year overviews if are self-employed or a sole trader; last two years’ business accounts if you are a limited company director; a copy of your credit report and proof of ID from all.
Having collated all of these documents together we proceed to book an appointment for your fact-find call. At this point, we discuss your income, your occupation, your deposits, your circumstances, in fact, all
of the information that we would need in order to be able to advise you appropriately. Once we have gleaned the information that we require from you we will research the market of all of the available lenders and provide you with a quote and a recommendation.
When you are happy with that, we will apply for the agreement in principle. This decision is usually made immediately. In certain instances, lenders may require a little bit more time to review the case. Sometimes that can take up to 24 to 48 hours. Once accepted, an AIP generally lasts for a period of three months, but if it expires we are generally able to renew it or get a new one. So if it takes a little longer than expected for you to find your dream home there is nothing to worry about.
As you are probably aware, applying for an AIP triggers a process of checks. These checks will be conducted through a credit reference agency such as Experian, Equifax and TransUnion. They will be scrutinising your previous account history with regards to things such as loans, credit cards, utility accounts and mobile phone contracts and the associated payments made over the past six years. They are also interested in the level of debt that you have in place at the moment, encompassing all the accounts that you currently have and all the debt that you owe. The credit check is also looking for adverse credit situations in the past such as defaults or CCJs (county court judgements), individual voluntary arrangements or debt management plans. All of the above will show up on your credit report and go towards what is known as your credit score.
A would-be lender needs to assess the risk that you pose to them. You need to pass their internal credit scoring system in order to gain an agreement in principle. Experian’s score is generally out of one thousand whereas Equifax uses a slightly different numbering system. So, a credit score is the reference agency’s indication of how likely you are to be able to obtain credit from them.
Lenders will be looking at other factors too such as the size of your deposit, your current income, your debt to income ratio and of course the property that you are attempting to purchase. These checks amount to what is known as an affordability check. The lender is checking whether or not you are basically able to afford the mortgage that you are asking for. They will investigate scenarios where they add varying levels of interest onto the monthly payment to assure themselves that if there were fluctuations in the interest rate you would still comfortably be able to afford the mortgage and the monthly payments.
Another measure that the lenders deploy in deciding how much they are prepared to lend you is what is known as the income ratio. They will use a loan to income cap which is basically a multiple of your income that they are prepared to lend, eg 4x, 4.5x, 5x etc. They will use that as well as the affordability check to determine how much it is that you can borrow.
Every lender has criteria based on what they find acceptable or unacceptable regarding who they lend to. Therefore they do criteria checks to ensure that the information gathered on you fits in line with their risk profile. It is precisely because of these rigorous checks that an agreement in principle is now worth far more than it used to be; lenders are using technology to improve their agreement in principle checking systems.
Momentum Mortgages are mortgage brokers based in Sevenoaks, Kent. We help people to buy, invest or remortgage property while reducing stress and saving time. We have helped clients all over Kent including Tunbridge Wells, Tonbridge, Maidstone, Swanley, Dartford, Bromley, Orpington and more