Agreement in Principle

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Agreement in Principle

Steven Hargreaves explains how an Agreement in Principle works and why this is a helpful step in buying a property.

What is an Agreement in Principle?

It’s an indication from a lender you’ve approached that they will lend you the amount that you require to purchase a property.

Many estate agents insist on a Mortgage in Principle, Agreement in Principle or a Mortgage Promise – it comes under a few different names. The agent wants to see this because it indicates that the lender will lend you the money you will need.

You will need proof of deposit and identification, so therefore an Agreement in Principle is the important bit that tells the estate agent you can buy that property.

What should I do if my estate agent is asking to see my Agreement in Principle?

When I see a client, I’m not a lover of actually arranging an Agreement in Principle or Mortgage in Principle too early.

If I was chatting to you this afternoon for a mortgage, and you didn’t have any issues with your credit report, I’d suggest leaving it as late as we possibly can to arrange.

Because each time you do a Mortgage in Principle it leaves a footprint on your credit score. If we do one today and then interest rates change in a week’s time and we do another, each one impacts your credit file.

A lot of mortgage brokers and estate agents aspire to do this very early in the process, but I actually prefer to do it quite late. Then, we’re approaching the lender that we intend to use and it only leaves one footprint on your file.

That said, even within the last week I’ve seen clients with quite a thin credit score. They don’t have much in the way of credit. They don’t have a credit card. In these particular cases I recommend getting a Mortgage in Principle quite early in the process, to ensure they can actually get a mortgage.

Do I have to have an Agreement in Principle through the estate agent I’m looking to purchase with?

No, quite the opposite, really. A lot of estate agents will indicate that it’s an easier process if you use them, but in essence it makes no difference. If you have a relationship with a mortgage broker, use that mortgage broker.

A lot of estate agents push you to use their financial services. But if a client rang me at 4.45pm on a Friday afternoon to say they’d seen a property and put an offer in, I could have a Decision in Principle on that client’s email within 15 minutes. They don’t take very long to do.

A lot of mortgage brokers like to do it early, but essentially you’re then not looking at the best deals. You’re just doing an Agreement in Principle to check that a lender will lend you enough money – and then they will shop around for the interest rates at a later date.

How long does an Agreement in Principle last?

An Agreement in Principle traditionally lasts three months. Lenders have different terms for how long they last. Most are three, some are four. I came across one the other day that was only for two months – which surprised me. It wasn’t an issue, but I did make a mental note.

How reliable is an Agreement in Principle?

The reliability is only as good as the information you put in. Here’s an example. I saw some First Time Buyers the week before last, that had seen a property and done an Agreement in Principle with their own bank – that’s fairly common.

They’d been told they could borrow the amount they needed and they came to me through a recommendation to look for the best rate. But when I looked at their incomes I couldn’t get them what they needed – because a lot of their salary was based on overtime, bonus and performance related pay. It wasn’t basic salary.

Lenders use different percentages of bonuses or overtime. Those clients looked on their payslips showing what they’ve earned this year and took that total as their earnings.

But his basic salary was a lot lower than that. Even the lender he’d been to wouldn’t lend him what he needed once he explained what was overtime, what was bonus etc. So a Decision in Principle is only as good as the information you put in.

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Can I make an offer with an Agreement in Principle? Does an Agreement in Principle mean you’ll get a mortgage?

Yes, you can offer with an Agreement in Principle. But it needs to be accurate. If we put in that you’re on £300,000 a year, the lender will give you a £1.5 million on affordability. If you’re actually on £30,000 a year and you’ve just put an extra zero in, that is going to give you some duff information back.

You can make an offer with your Agreement in Principle, but it doesn’t necessarily mean that the lender will give you that amount once they actually get your payslips, bank statements and credit file.

Will I need a credit check? Does an Agreement in Principle affect credit score?

All lenders will do a credit check for a Mortgage in Principle, but some will do a soft check and some will do a hard check. Only a hard check leaves a footprint on your credit score.

So if you’ve had a few Agreement in Principle checks, all hard, those can affect the credit score. A few years ago I saw a client who had an offer accepted. I wasn’t aware that the estate agent’s broker had already recommended her bank and her building society, where she had her savings.

She came in on Saturday morning to arrange the mortgage and it came back as a ‘refer’ – so it wasn’t accepted or rejected. When I spoke to the lender it had been referred because four or five other credit checks were done within the last week, which showed up on her credit score.

I asked her if she had applied elsewhere for a mortgage. She said no, but that she did go see the bank, which did a Decision in Principle and she saw the building society which also did a Decision in Principle. She also went to another broker.

All these checks left marks on her credit score. That mortgage did go through, but the lender flagged it up and wanted to know why there were so many credit checks in a week.

She ended up staying with me for donkeys’ years. But that’s why I don’t like doing a lot of Decisions in Principles. I preferred to do one at the right time.

How do I apply for an Agreement in Principle? How long does it take?

Ordinarily, if I were seeing you this afternoon and we arranged the appointment yesterday, I would have sent you my fact find to complete. You would fill in your income, your liabilities and where you live.

If you need a Decision in Principle, that fact find makes it a simple job on our system. It will produce a Decision in 15 minutes tops. And that’s another reason for leaving it late rather than doing it too early.

Why should I see a mortgage broker to get an Agreement in Principle?

I understand why people arrange Decisions in Principles with their own bank or on a website – I would probably do the same myself. But I would try and make sure that the lender leaves a soft footprint rather than a hard one for the reasons I’ve already given.

I would also try not to be talked into doing an Agreement in Principle with the estate agents – they will all have a mortgage advisor. They will all invite you to do it through them, but it can affect your credit score quite badly.

So choose your mortgage broker – we’ll tell you when it’s the right time, explain how it all works and at the same time find the best deal for you.


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