One of the biggest and most stressful aspects of buying a house, whether as a main residence or to let out, is obtaining a mortgage.
As with most aspects of buying property, it pays to be prepared - and that's where a mortgage agreement in principle can help.
Here, we'll look at what a mortgage agreement in principle is, how you can get one and the pros and cons of doing so.
A mortgage agreement in principle: Everything you need to know
Sometimes referred to as a ‘decision in principle’, an agreement in principle sees a lender state what they might be prepared to loan you based on specific information you supply.
Providing certain information to the lender, including details on income, will enable them to decide if you are 'mortgageable' and for how much.
When requesting an agreement in principle from a mortgage lender, you’ll need to provide:
• Details on your income, including payslips or accounts if you’re self-employed
• Information on your debt and spending
• Details on any credit agreements you have
• Three years of previous addresses
The difference between an agreement in principle and a mortgage offer
A mortgage agreement in principle is an indication of what a lender might be prepared to loan you to buy a property.
A mortgage offer, however, tells you the amount your lender will definitely loan you, the interest rate you’ll pay and the term of your mortgage.
The mortgage offer comes after you’ve completed your application, but only if your lender is satisfied that you meet their criteria.
Getting a mortgage agreement in principle
Your lender will require certain information in order to issue you with a mortgage agreement in principle.
As well as details on your income, debt and spending, they’ll also need to know the size of the deposit you have and will undertake a credit score to establish if you’re a good person to lend to.
Before applying for a mortgage agreement in principle, the first thing to do is work out your budget.
Debt will always affect your borrowing capability, so take a forensic look at your finances and try to eliminate any outstanding debts before you apply for a mortgage or an agreement in principle.
Next, use an online mortgage calculator to get an idea of how much you could potentially borrow.
Once you have sorted your finances and worked out the maximum price you are able to pay for your new home, you are ready to seek a mortgage agreement in principle.
Speak to a lender or mortgage broker to explore mortgage products and interest rates that work for you.
Using a broker can be a good way to get an idea of the kinds of mortgages on offer across the market, but always look to use a fee-free broker.
Once your lender has details on your income and other key information, they will undertake a credit check to establish your credit history.
All being well, you can have an agreement in principle quite quickly.
How long does it take to get a mortgage agreement in principle?
It’s possible to get a mortgage agreement in principle in as little as 15 minutes online.
But in order to obtain one that quickly, you’ll need to have all the documents and information your lender needs and there would need to be no issues.
If your lender needs to take a closer look at the paperwork you’ve supplied, or your credit file flags up any concerns, it can take a few hours or even a few days to get your agreement in principle.
Is a mortgage in principle a good sign?
A mortgage agreement in principle is a good sign that you’ll be able to secure the mortgage you need – but it’s not a guarantee.
You could still be rejected for a mortgage when you come to complete your application, once your lender undertakes the full underwriting process.
However, having a mortgage agreement in principle puts you in a great position as a buyer – because your seller’s estate agent and the vendor themselves will know you’re serious.
In a busy market, with buyers clambering for all the top properties, a seller who sees you are ready to proceed quickly with a mortgage agreement in principle is far more likely to accept your offer over that of a buyer who is not in a position to move.
Also, if you have had issues securing credit previously, obtaining an agreement in principle can provide you with added peace of mind that your purchase should be achievable.
However, you should also be aware that some agreements in principle will leave an imprint on your credit history.
Most lenders will perform a ‘soft’ credit search on you at this stage, but if they require more detailed information on your credit history, they may undertake a ‘hard’ search, which will leave a footprint on your credit file that other lenders could see should you not go ahead with your mortgage.
Finally, bear in mind that mortgage lenders' rates do change and if you are not in a position to finalise your agreement in principle for several months, interest rates may have changed, meaning your proposed deal is no longer as attractive as it was.
Do you need a mortgage agreement in principle to make an offer?
You don’t need a mortgage agreement in principle to make an offer on a property.
But having one in place can put you in a strong position with sellers and estate agents.
Having an agreement in principle in place:
• Shows you’re serious about buying
• Could speed up the sales process as your lender already has lots of the documentation and information they need
Tips for getting a mortgage agreement in principle
While getting an agreement in principle can be a relatively straightforward process if your finances are in good order, there are things to consider:
• Mortgage agreements in principle do lapse after a period of time so securing one too early in the process can mean having to go through the process again if you don't find a property to buy within that time frame.
• If you think you may change jobs in the period between obtaining a mortgage agreement in principle and completing your application, it might be better to wait until you are in your new role. A change in circumstances such as employment could affect your ability to borrow.
How long is a mortgage agreement in principle valid for?
Mortgage agreements in principle are generally valid for between 60 and 90 days.
If any of your details or circumstances change during that period, it’s always a good idea to check with your lender and request another agreement in principle if one is needed.
And if you haven’t found a property to buy in the timeframe your agreement in principle is valid for, you may have to request another one.
However, if your circumstances remain the same, this should be a straightforward process if you remain with the same lender.
Can a mortgage be declined after an agreement in principle?
Although a mortgage agreement in principle is a good sign that you’re able to secure the funding you need, it’s not a cast-iron guarantee.
Your lender could still reject your full mortgage application, even if they’ve previously issued you with an agreement in principle.
This could be because:
• They performed a ‘soft’ credit search on you and the ‘hard’ search as part of the full application process has revealed some concerns
• Your income or employment circumstances have changed since your agreement in principle
• You’ve taken out additional credit since your agreement in principle
• You’ve missed payments since your agreement in principle
Shared Ownership and a mortgage agreement in principle
If you’re looking to buy a property through the Help to Buy Shared Ownership scheme, a mortgage agreement in principle can be helpful.
Not all lenders offer Shared Ownership mortgages, but by having an agreement in principle, you can show the housing association selling a share of the property that you are a serious buyer.
Some housing associations will require an agreement in principle before offering you a property.
If you already own a property through Shared Ownership and you want to purchase a bigger share, you can also obtain a mortgage agreement in principle in the same way.
If you’re living in England but looking to move to Scotland, or vice versa, there are some key differences between the two nations when it comes to buying property.
You may be looking at buying a new-build home, so we’ve outlined everything you need to know about them here.
And if you’re considering using the Help to Buy scheme, our guide tells you everything you need to know about equity loans and how they work.