Credit Building > How does a mortgage agreement in principle work?

How does a mortgage agreement in principle work?

Wollit Team3 minute read · Updated 30th June 2024

An Agreement in Principle (also called an AIP) for a mortgage in the UK is an assessment by a lender to determine how much you could borrow to buy a property.

While an AIP does not guarantee you’ll get the mortgage, it shows that the lender is willing to lend you a certain amount if you can later pass their complete mortgage application and detailed credit check.

Why do I need a mortgage Agreement in Principle?

An Agreement in Principle is helpful for a few reasons:

It gives you an idea of how much you can borrow to search for homes within your budget.
Having an AIP can help you show to estate agents and sellers that you are serious about buying a property and have taken steps to secure financing.
With an AIP in hand, you can make offers on properties you are interested in, as it shows you have a good chance of obtaining a mortgage. This puts you in a stronger negotiating position.
Getting an AIP is also the first step in the mortgage application process. This allows you to solve any issues with your credit score or financing early on.
Finally, an AIP allows you to get a sense of your mortgage’s chance of approval without affecting your credit score. This is because applying for an AIP only involves a soft credit check, which does not impact your credit score. In contrast, a full mortgage application involves a hard credit check that can temporarily lower your score.

How do I get a mortgage Agreement in Principle?

To get an AIP, you must usually provide details about your income, existing bills and spending, other credit agreements, and addresses for the last three years.

Here are the usual steps you need to follow to get one:

Gather the required information: each mortgage lender needs different information, but in most cases, bank statements from the past year, payslips, and address history are the bare minimum. If you’re self-employed, add SA302 forms from the past two to three years.
Apply for an AIP: you can do this online or by visiting the lender’s branch.
Undergo a soft credit check. The lender will need your permission, but don’t worry – it does not affect your credit score.
You should receive a decision on your AIP within 15 minutes.
Once you have the AIP, it’s time to contact estate agents and sellers. Now you can show that you are a serious buyer.

Remember, an AIP is not a mortgage guarantee and is usually valid only for 30 to 90 days. Make the most of it during this time.

What is the difference between a mortgage Agreement in Principle and a mortgage offer?

The main difference between a mortgage AIP and a mortgage offer lies in their legal status and level of commitment.

An AIP is just an assessment made by a lender which shows how much they would be willing to lend to you. It is not legally binding and does not guarantee a mortgage. It’s meant to help you understand what you can borrow to start looking for properties within your budget.

On the other hand, a mortgage offer is a formal, legally binding document from a lender. You will only receive one after completing a mortgage application, detailed credit check, and property valuation.

Once accepted, a mortgage offer is valid for 3 to 6 months and allows you to proceed with the home buying process, including signing the actual contract with the seller.

What factors influence my chances of getting a mortgage in principle?

The factors that influence your chances of getting a mortgage in principle are the same ones that determine your eligibility for a mortgage approval.

Here are the main ones:

Employment history. A steady income history is also important for your chances of approval. Most lenders ask full-time employees to have been in their jobs for at least three months—or provide two years of tax documents (SA302 forms) if they’re self-employed.
Down payment. A larger down payment reduces the amount you need to borrow, which means that if you can put more money down, you’re a smaller risk for the lender. A larger down payment also means a higher chance of approval.
Debt-to-income ratio. This is calculated by dividing your total monthly debt payments by how much you earn each month. Lenders look at this to understand whether you can meet your mortgage payments and debts. A lower debt-to-income ratio means a higher chance of approval.
Credit score. Lenders use your credit score to assess your creditworthiness. A higher credit score indicates lower risk and increases your chances of getting an AIP and a mortgage offer.

Your credit score is also essential for another reason – it’s usually the first thing an eligibility check tool looks at.

In other words, if you don’t have a good enough credit score, you might not qualify for a mortgage even if you technically can afford it (have a good enough income and a hefty deposit).

The good news is that many apps can help you build and improve credit. One of them is Wollit.

Wollit is an app available on both Android and iOS. It works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you make the most of your rent while you prepare to become a homeowner.