Thinking of getting onto the property ladder? You’ve probably heard mention of the term ‘mortgage in principle’ and may have a few questions about this stage in the journey towards home ownership. This post answers those queries.
Let’s get started, shall we?
What is a mortgage in principle?
A mortgage in principle - otherwise known as a Decision in Principle or Agreement in Principle - is basically an initial agreement from your chosen lender that states exactly how much they are willing to lend you, the buyer.
The mortgage in principle is given based on the documentation and information you provide, but it’s important to bear in mind that the mortgage still needs to be underwritten before a full and formal mortgage offer is made.
More on that in a bit.
Do you need a mortgage in principle?
No, there is no law stating that a mortgage in principle is required in order to buy a home, but there are a few solid reasons why most homebuyers opt to get one before they apply for a full mortgage.
Four reasons why getting a mortgage in principle makes sense
- Obtaining a mortgage in principle gives the buyer a solid figure to work with and allows them to begin their property search without risk of overreaching financially.
- Although a mortgage in principle is just a guideline, you will still have to pass some basic checks before a lender will issue one. This means a mortgage in principle can be a decent indicator that you are able to meet the mortgage provider’s criteria and lessens the chances of rejection when the time comes to apply for a full mortgage.
- Having a mortgage in principle shows buyers and agents that you are serious about moving home. It is also a clear signal to both parties that you can actually afford the property you are enquiring about.
- Receiving a mortgage in principle is far quicker than applying for a full mortgage, so it can significantly speed up the entire process of buying a home. Having a mortgage in principle in place allows the buyer to make offers on property straight away and will also speed up your application for a full mortgage when the time comes.
When is the right time to apply for a mortgage in principle?
In short, the sooner the better.
Once you’ve made the decision to move and have decided on a lender, you should apply for a mortgage in principle. As we’ve already discussed in the section above, having a mortgage in principle in place gives you a foundation to work on, as you’ll know exactly what you can afford.
Will getting a mortgage in principle cost me money?
It shouldn’t. The majority of lenders offer mortgage in principle agreements without charge.
Even if you are using a mortgage broker, most will only charge you once you have finalised a full mortgage, not for a mortgage in principle application.
Can asking for a mortgage in principle affect your credit rating?
All mortgage in principle agreements require the mortgage provider to perform a credit check, but how they carry these out can vary from lender to lender. There are two ways in which a credit check can be done. These are known as soft and hard searches.
Soft searches are a cursory glance at your credit history and will not leave a trace, so other lenders will not be able to see that you’ve already applied elsewhere. This type of search should not affect your credit score.
Hard searches, on the other hand, do leave a footprint behind on your credit file. Interestingly, even hard searches do not directly affect your credit score, but they are visible and that can affect your full mortgage application further down the line.
Lenders will look a lot closer when processing a full application, and if you’ve had a number of hard searches go through your credit file in a short period of time it can raise a red flag to mortgage underwriters, as they can look like previous rejections of credit.
Is a mortgage in principle a guarantee?
No. Although having a mortgage in principle will give you a firm idea of what you can afford in the property market, it’s still not a guarantee that the lender will stump up the cash. Many more in depth checks will be made when you apply for a full mortgage, so it’s absolutely vital to be honest when applying for a mortgage in principle.
Documents you’ll need to get a mortgage in principle
Common documents asked for by lenders include:
- Bank statements
- Accountancy books if you are self-employed
- Existing credit agreements
- Utility bills
- List of previous addresses
How to get a mortgage in principle
If you have the necessary documentation ready, getting a mortgage in principle is a relatively straightforward affair and can be done either directly with your chosen lender or via a mortgage broker.
Despite the additional expense right when you don’t need it, we generally recommend using a mortgage broker. A good broker will have access to deals that simply aren’t available to the general public, and that can save you a lot of money over the course of a 25-30 year mortgage.
Can you be rejected for a mortgage in principle?
Unsurprisingly, yes. The reasons why a mortgage in principle may be rejected are equally predictable and include:
- Poor credit rating
- High levels of existing debt
- Frequent changes in employment
- Low income
- Insufficient deposit
- Inappropriate spending (especially on credit)
While it will be disheartening to hear that your mortgage in principle application has been turned down, it doesn’t necessarily mean your dreams end there. Other lenders may be willing to lend, as each will have slightly different eligibility criteria.
Find out why you were rejected and try to put things right before you reapply or look elsewhere. It could be something simple to fix, but if it isn’t, speak to your mortgage advisor. They will have a handle on who will be most likely to lend, given your circumstances.
Remember, though, that numerous applications can sour your credit file and you may end up paying more via increased interest rates if you do find a lender willing to offer you a mortgage.
As we’ve already mentioned, it’s important to bear in mind that a mortgage in principle is not a guarantee that your full mortgage application will go through, as further checks will be made.
How long does a mortgage in principle last?
Typically, a mortgage in principle will last between 60 and 90 days. This will vary from lender to lender, so it’s wise to ask exactly how long yours is valid for (although it should be made clear to you anyway).
If the validity period (the timeframe of your mortgage in principle agreement) elapses, don’t worry, renewing is usually a simple process. That being said, if your circumstances have changed or there has been a significant shift in the economy as a whole, a renewal may be less straightforward.
As a general rule of thumb, if anything in your initial application changes, you’ll need to inform your lender or broker to ensure your agreement remains viable and valid.
If you are looking to buy property in central London, the suburbs to the east of the capital, or somewhere in West Essex, Petty Son and Prestwich can be of service. We have been helping people just like you realise their property dreams for well over a century, and we’d love to assist you, too.
Give our friendly team of property experts a call to find out how we can help you find your next home.