IS AN AGREEMENT IN PRINCIPLE A FORMAL MORTGAGE OFFER?
An agreement in principle (AIP) is not a formal mortgage offer, but it indicates how much a lender may be willing to lend you. I use 'Indicates' because anyone can go directly to a lender's website and gain an AIP. What is more concerning is that I have recently seen a TV advert from a lender stating it takes less than 10-minutes for you to gain an online AIP from them.
On top of this, due to not having to supply documents, you could tell them you earn £75,000 per annum, no children and no outstanding credit commitments and receive an agreement in principle for £375,000. However, when you come to submit the full application, you will be required to send your documents to the lender to prove this, and if the above isn't correct, and you earn less and have outstanding commitments, you will quickly find out you can not borrow the £375,000 stated in the AIP provided via the lender online.
Should you gain an Agreement in Principle before finding a property then?
In my opinion, YES, I would advise that you gain an Agreement in Principle for various reasons. However, some brokers will not believe in the AIP until you have found a property. So why do I believe in gaining the AIP before finding a property?
The first reason is that in the current housing market, you will find that most estate agents will want to see an AIP (if purchasing with a mortgage) before you go and view properties with them. This is due to the current property market being a seller's market due to lack of property and many buyers. By running these checks, the Estate Agent is trying to ensure that everyone who views a property with them is in the best position to proceed with an offer. I must stress you are not obliged to use the Estate Agents' mortgage advisor. It has come to light that some firms are trying to state this is the case, and this is conditional selling which isn't allowed under the Property Ombidsmum rules set out for Estate Agents.
The second reason is that a broker/lender can not promise that the affordability calculator will always be the exact amount you can borrow. Some lenders will base the amount of borrowing on your credit report and what we call internal scoring. You could have a perfect credit report or even a lack of credit report, and sometimes the perfect credit report or lack of report can not gain a mortgage due to the internal scoring checks. The decline of the AIP could be for various reasons, such as lack of credit facilities used, not being on the electoral roll and even not holding your current account for long enough. The previous points form part of the lender's internal scoring system. They then use this information to score you points for each relevant part they use, and you are required to achieve a set amount of points for acceptance. However, lenders can change the required points depending on the business levels they need for that month or quarter. The scoring system that lenders use is never published.
These checks could be the difference between gaining a 90% mortgage or an 85% mortgage, and if you only have a 10% deposit, you can not proceed on the property you want to purchase.
Now you may be thinking;
Do I still need this AIP as it will require a credit check to be undertaken, and can this damage my credit report?
In short, 'YES', you do need the AIP still. A single credit check doesn't harm your credit report as much as people make out it does. However, your credit score will drop slightly for each credit check performed, but this will not have a significant impact on lending. Each lender will run a soft or hard footprint at the AIP stage, and most AIPs are now soft footprints.
To find out more on credit reports and credit checks, please visit the following blog where I talk about this in more depth;
But how much borrowing should you ask for in the AIP process?
My advice is always to gain the AIP for the highest amount possible, as it's more straightforward to ask for less money from a bank than more at a full application. Also, by gaining a higher lending amount, you achieve your maximum affordability.
Once you have had an accepted offer on a property, we will re-visit your AIP and ensure that this is the best lender for the purchase regarding interest rates etc.
After our final market research, we may change lenders because you didn't utilize all of the AIP borrowings, as you found a lower valued property or another lender has increased their affordability model and provided you with a better mortgage product.
In short, an Agreement in Principle is not a formal mortgage offer. However, please make sure you gain an AIP before looking for a new home, as you don't want to fall in love with a property you may not be able to afford due to various factors that can crop up.
And lastly, please make sure you use a MORTGAGE BROKER as it is our job to ensure that we place you with the correct lender and try to minimize issues between AIP and a formal mortgage offer being issued.