If you are looking to purchase a property, you may come across the terms ‘mortgage agreement in principle’, ‘mortgage in principle’, or ‘agreement in principle’. These three terms all refer to a statement from a lender saying that they agree ‘in principle’ to provide you with the borrowing you require subject to your information declared being verified, and the property you find being suitable to lend against.
A mortgage in principle is designed to give borrowers a strong indication of how much they may be able to borrow and some reassurance that they meet the lender’s basic lending criteria. As soon as you’ve made up your mind to start home-hunting and have an idea of what you may need to borrow, it’s generally a good idea to apply for a mortgage in principle.
This way you can start to search the property market with the confidence that you should be able to obtain the level of mortgage borrowing that you will eventually need to support a property purchase in the property price range you are looking at.
How does a mortgage in principle work?
When you or your mortgage broker apply for a mortgage in principle, the lender will require data to be inputted into one of their application forms, upon submission of that form the bank or building society will do a credit check to confirm the information on your credit file is correct, and also they check the conduct of your finances.
This is so that they can establish whether you are a suitable borrower and whether you meet their eligibility criteria. They will use the income information you provided to determine how much they may be willing to lend to you. At this stage, most lenders do not require any additional proof of income or affordability before giving an outcome, of pass, refer or decline. Having a mortgage in principle will put you in a good position to make a firm offer on a property once you find the one you like.
When a lender has issued a mortgage in principle, they may provide you or your mortgage broker with a certificate. What this certificate includes will differ between lenders, but it could be:
- A statement confirming that they are willing ‘in principle’ to lend the amount applied for
- A statement that confirms the maximum sum they may be willing to lend based on the information provided
- A statement that confirms that your ‘mortgage in principle’ application has been accepted.
It is important to remember that a ‘mortgage in principle’ is not binding. The lender could still refuse you a mortgage on those terms. Don’t confuse an ‘agreement in principle’ with a ‘formal mortgage offer’. To get a formal mortgage offer, you will need to submit a detailed mortgage application with your full personal and financial details and supporting documentation to a lender – something that a mortgage broker and advisor such as us here at Mortgage Light will be happy to help you with. You should only really do this once you have an offer accepted on a property.
Do you need a mortgage in principle to make an offer?
No, there’s generally no requirement to get a mortgage in principle in order to make an offer on a property, but it can encourage sellers and estate agents to take you more seriously when house-hunting. In fact, some agents may even refuse you a house viewing unless you have a valid mortgage in principle in place, to show that you are a serious purchaser.
An ‘in principle’ offer also gives you a clear idea of what you can afford so that you know what property price points you can start exploring. You may even end up being offered a higher amount than you were expecting, giving you a little greater scope in your property search. Plus, by knowing what you can realistically expect to borrow, a mortgage in principle reduces the risk that you’ll end up applying for a mortgage that is too big, resulting in a potential rejection. If you are rejected for a mortgage then this will be recorded on your credit file and it can make it more difficult if you reapplying elsewhere.
Although not mandatory, mortgages in principle offers are pretty commonplace. In 2019, 53% of homeowners said that they got an agreement in principle before applying for their mortgage and this number was highest amongst first-time buyers, with 62% having taken out an agreement in principle before buying their home.
How do I get a mortgage in principle?
You can apply directly to most lenders for a mortgage in principle, however, you may prefer to enlist the help of a mortgage broker and advisor. They will guide you towards lenders with the most suitable products for your circumstances and an appetite for meeting your borrowing requirements. At Mortgage Light, we will ask you for some personal and financial information to support your application, such as:
- Basic personal information, including your previous addresses (usually going back 3 years)
- Proof of earnings by way of payslips and bank statements, or accounts if you are self-employed
- Details of your monthly outgoings, such as credit card bills, utility bills and subscriptions
- A breakdown of any credit agreements you may have
- Confirmation of the size and availability of your deposit.
All of this information will be needed later anyway in order to complete your full mortgage application, so gathering this information saves us a bit of time later down the line and may also help to identify and tackle any potential issues early.
Once we have all the information that we need, and after discussions with you, we’ll go away and speak to, what we feel are the most appropriate lenders. Our experience and knowledge of the market means that we know exactly where to go to find you the best potential mortgage deal straight away, saving you time that you may have otherwise spent searching. We can generally get you an agreement in principle back within as little as 24 hours, and this agreement is usually valid for between 60 and 90 days, depending on the lender.
There should be no charge from either a lender or a mortgage broker for obtaining a mortgage in principle offer for you. At Mortgage Light, we only charge for our services once you have found a property you wish to buy and have agreed to a purchase price. Our fee is due upon you instructing us to apply for your mortgage – but only if you are happy with our recommendation.
Does a mortgage in principle affect your credit rating?
A mortgage in principle offer does require lenders to undertake a credit check. Some lenders will do a soft search on your credit file, and others will do a hard search. A soft search checks against your file without leaving a ‘footprint’, which means the check will not be visible to other lenders and so shouldn’t affect your credit file. Any eventual formal mortgage offer, however, will require a hard search.
A hard search shows on your file as an application for credit. The search itself should not affect your credit rating, however, if a lot of hard searches are made on your file within a short space of time, then this can have a negative impact on your credit score, as it could signal that you are struggling to get accepted by other lenders. It also means that lenders looking at your credit history later for your full mortgage application may think that you have been rejected for credit several times. This may be taken as a red flag, which may prompt them to choose to refuse you for mortgage facilities.
There are three main credit reference agencies in the UK – Experian, Equifax, and TransUnion. We recommend that before you apply for any type of mortgage facilities, that you obtain a copy of your credit report and examine it carefully to make sure there is no incorrect adverse information recorded. If there is any incorrect information recorded, then you should contact the relevant company to get this removed or put right.
If you find that you have a low credit score, it is often worth making sure that your personal details are correctly recorded on the electoral register at your current address, this may help to offset, in part, a poor credit rating.
Lenders use information from the electoral register to confirm things like your name, address, and residential history. They need to check that the basic information about you is correct and up-to-date before they think about offering you a mortgage.
With most lenders, it adversely affects eligibility for borrowing if they can’t find your details on the electoral register. Some might even choose to simply refuse your application if they can’t match the personal details you have given with the electoral register.
Get the house hunting process off to the right start by turning to us here at Mortgage Light. We have helped thousands of people get the mortgage that they want, meaning that they can purchase the property that they want. And very often, it all starts with a mortgage in principle.
What are you waiting for? Get in touch with our expert team today and let’s get started.