Agreement in Principle
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Agreement In Principle – Part 1
Steven Hargreaves explains how an Agreement in Principle works, in this two part episode.
What is an Agreement in Principle?
An Agreement in Principle is an indication from a lender that they are prepared to lend you an amount of money for buying a first or second house.
You tend to find that a lot of estate agents will require this, because it proves that you can actually get a mortgage. Once you’ve made an offer they can then mark the property as sold subject to contract.
It’s an indication from the lender that they are prepared to lend you some money based on the information that you put into their system.
What else can an Agreement in Principle or AIP be called?
It’s also known as a Decision in Principle, Mortgage Promise or Mortgage in Principle. I’ve always called it a Mortgage in Principle, mainly because I’ve always had an issue spelling ‘decision’. A lot of people call it a Decision in Principle, too.
What should I do if my estate agent is asking to see my Agreement in Principle? How do I get one?
Historically, we’ve always got a Decision in Principle at the point when the client’s ready to purchase a property. There’s no point in doing one six months before you start looking, because each one tends to leave a footprint on your credit report.
If you’ve never had any late payments, missed payments or county court judgements, we’re not usually going to have any issues. Therefore, I would do a Mortgage in Principle as late as possible, because then we’re only putting one footprint on a client’s credit file.
Over the last couple of years as the market’s been very busy, a lot of estate agents have been asking for it before a client goes to view a property. That just brings everything forward a little. They only want people with a Mortgage in Principle looking at the property, so they know there’s no issue where multiple people are viewing it.
A lot of my clients tend to be First Time Buyers, and they don’t have much credit. They have a ‘thin’ credit file. There’s no credit cards or loans because they still live at home with mum and dad. They haven’t got gas or electric bills. In that particular case, I would talk to the client about getting a credit card and just putting your Tesco meal deals on it. That suddenly gets you a credit file.
In some cases I would tend to do an Agreement in Principle quite early on, to see what we’re up against. If you’ve got a credit card, a loan or car finance, and you keep up with your payments month in, month out your credit file should be quite good. So a Decision in Principle shouldn’t be an issue.
Do I have to have an Agreement in Principle through the estate agent I’m looking to purchase through?
No, quite the opposite. The estate agent traditionally acts for the vendor, not for the purchaser. This is why you would ordinarily look for a mortgage broker, because they’re acting for you.
Estate agents work on the vendor’s behalf, so there’s always a slight conflict of interest there. The estate agent would ask for an Agreement in Principle.
Ordinarily, if you and I had a chat about a mortgage, you would have given me all your documents and I would leave it as late as possible to get you an Agreement in Principle – ideally once you’ve seen a property you want to buy.
You can then send me an e-mail or a WhatsApp or a text to say you want to make an offer. The estate agent needs an Agreement in Principle – and I could have one done within 10 to 15 minutes. It will be ready in your emails or on your WhatsApp.
Hopefully, if your offer gets accepted we would go on to put in a full mortgage application with that lender. That’s why I prefer doing it a little bit later. Some mortgage brokers prefer to do it earlier, but there isn’t a right or a wrong way. It’s just the way I’ve always worked.
How reliable is an Agreement in Principle?
Reliability is very much based on the information you’ve put in. I’ve frequently heard of people who have had an Agreement in Principle from a lender, they find a property, submit their documents and an application – and then the lenders decide to decline.
That’s normally because things have been missed off the Agreement in Principle application. Perhaps loans, hire purchase or credit cards are higher than initially declared.
A client might tell me their salary is £30,000 a year, but it might be £25,000 basic salary and £5,000 performance related pay. Some lenders only use 50% or 60% of that bonus pay.
So again, the Agreement in Principle is only as reliable as the information that’s in it. If it’s been done quickly without the correct information, you could have an issue.
How long does an AIP last?
Each lender is slightly different. Some last a month, some last three months. I did one the other day for a client where we’d actually done the AIP a month ago, but it was for the wrong amount. They made an offer on a property but unfortunately it wasn’t accepted. It took another month to find somewhere else, and I just amended the AIP – because that doesn’t leave another footprint.
With a longer Decision in Principle, the lender’s criteria could change – that happens quite regularly. We had some significant issues the year after COVID, where lenders’ criteria were changing weekly.
We’d do a Decision in Principle where a lender might use 100% of overtime, but then they’d change the criteria to only use 50%, and they wouldn’t honour the original Agreement in Principle. That’s another reason for doing it as late as possible. Then we’re using the right lender, we know they’re going to lend and I would have all your information on file so I know I’m keying everything in correctly.
Can I make an offer with an Agreement in Principle? Does an AIP mean you’ll get a mortgage?
Yes – and that’s what an estate agent would want before you put the offer in.
Unfortunately an AIP doesn’t mean you’ll get a mortgage, because as I mentioned, the information may be wrong, or not up to date. Perhaps you did a Decision in Principle two months ago and then missed a payment on your credit card. When you put a full application in, you’ve suddenly got that missed payment and that would affect the borrowing.
How do I apply for an Agreement in Principle? How long does this process take?
Normally we would have a chat and go through what you’re looking at doing. I’ll have your bank statements and payslips ready. Then, a month later you find a property and ring me at 4:45 on a Friday afternoon – your AIP could be on your desk by 5:00pm. It takes 10 or 15 minutes, that’s all.
It’s not a big job. Quite regularly we see someone who’s done a Decision in Principle with one lender based on their rates. Then by the end of that week, they find another with a better interest rate and decide to do another AIP with that one.
But each Decision in Principle you do leaves a footprint on your credit file. You don’t really need to do that. If you’ve got a Decision in Principle from a lender, that’s enough.
I had a client that contacted their own bank three weeks ago and he’s hoping to make an offer on a property tomorrow. We filled out my fact-find and he asked if I would get him another Decision in Principle – and I said absolutely not. The AIP he’s got will be sufficient for that estate agent to take the house off the market, assuming his offer is accepted.
Is there anything else we need to know before we come back with Part Two?
I think we’ve covered most of it, but the benefit of using a mortgage broker is obviously that we have all the different banks and building societies at our fingertips. We’ve got a great choice. Most applicants tend to look at who they bank with, and that’s about it. That’s the benefit of using a mortgage broker.
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Agreement In Principle – Part 2
We explore more about an Agreement in Principle – or an AIP for short – with Steven Hargreaves.
When should I get an Agreement in Principle?
A lot of that depends on your situation. If you’re a very young First Time Buyer, for example, you might have a very thin credit file because you don’t have credit cards, you don’t have loans and you’re still living at home with parents. In that case, it’s worth getting something reasonably early so you know what you’re up against.
You can always increase that credit score – and we’ll work on that together. Ordinarily, I’m not a fan of doing it too early. In most circumstances I prefer doing it later, as less footprints will go on your credit file. If you know you haven’t missed any payments, it’s really just about the affordability. I can work that out with a lender very quickly without leaving a footprint on your credit score.
What information do I need to get an Agreement in Principle?
I would send you a form to complete, that includes your name, address, middle names, date of birth and address history. Most lenders are looking for three years’ address history. Once I know what job you do, I’ve got all the information I need to submit a mortgage in principle, when the time is right.We then chat through your circumstances and work out which is going to be the most beneficial lender for you.
How is affordability calculated for an Agreement in Principle?
It’s the same as for a full mortgage application. It looks at your salary and any performance related pay, such as overtime or bonuses. Often lenders take an average of your payslips to assess your overtime. Then we look at your liabilities such as car loans, credit cards and outstanding credit. Whether you have children is a factor, because children reduce affordability.I’ve just mentioned the fact-find – and all that information would be there. I’ve therefore got everything I need to prepare that Agreement in Principle. I will do the affordability calculations first, to make sure the lender is prepared to lend to you. Then, I would do the Agreement in Principle.
Can my mortgage be declined after an Agreement in Principle?
Yes – it isn’t guaranteed because an Agreement in Principle is only as good as the information we’ve put in there. At the application stage, the lender would need the bank statements and pay slips, and they would do a hard credit check, rather than a soft check, which is more detailed.If we did an Agreement in Principle for you six weeks ago and it passed, but since then you’ve missed payments on your credit card, had a late payment or got a County Court Judgement, the lender would see that on your credit file and may therefore not lend.
An Agreement in Principle is merely an indication that the lender would accept you, subject to the documentation coming in. Those will be fully assessed and then the mortgage will be approved or declined.
Will I need a credit check? Does an Agreement in Principle affect credit score?
Yes, the majority of lenders do credit checks – although one lender doesn’t, in actual fact. Each credit check does affect your credit score. If you went out this afternoon and spoke to the top 10 lenders and did a Decision in Principle with each of them, they would all do a credit check.If you then looked at your credit file tomorrow, that credit score would be lower. A lender can also see the other credit checks that have happened. So it’s always worth keeping Decisions in Principle to an absolute minimum.
That’s why I tend to do these very late in the process rather than very early, because we’re then only leaving one footprint, and we’re using that same lender to put a full application in at the same time.
Can I get an Agreement in Principle if I’m a First Time Buyer?
Yes, and I would chat through the circumstances. As I mentioned, if it’s a younger First Time Buyer and they’ve got a very thin credit file, I would tend to do a Decision in Principle much earlier in the process, just to make sure we’re OK with everything. If it’s a second time buyer, or a client who knows they’ve never missed any payments, I would tend to do it later.But certainly, for a First Time Buyer we would chat through the best time to do this. Some people want the reassurance of a Decision in Principle before they start looking at properties, which I understand. They don’t want to be let down a week or two later. So with a lot of First Time Buyers, we do it sooner rather than later, just from a reassurance perspective.
Is it harder to get an Agreement in Principle if I’m self-employed?
No, and I get asked this many times from people who are self-employed, or a limited company director or in a limited partnership. It’s not necessarily any harder, it’s just about making sure that client knows what their income is.If you’re employed and you’re earning £30,000 a year, you’re on £30,000 a year full stop. For a limited company, we would use dividends plus basic salary; for a sole trader, it would tend to be net profit. If it’s a partnership, it’s the share of net profits.
There are different ways of doing it, but as long as you’ve got that information we can make sure you go to the right lender. Getting an Agreement in Principle is exactly the same whether you’re self-employed, employed or you run a limited company or LLP.
I’ve been declined an Agreement in Principle. What can I do?
We’d have to find out initially why it’s been declined. Are there missed or late payments? Is it based on credit score? Each lender has different criteria.A few weeks ago, we were looking at a First Time Buyer who had about a 15% deposit saved up, but they ideally only wanted to use 5% because the house needed quite a lot of work on it. We did a Decision in Principle at 95% and unfortunately it failed. But 90% was no issue.
From that client’s perspective, the decision was made for them. They had to aim for a 90% mortgage. Lenders do this from a risk perspective. It is harder to get a 95% mortgage than a 90%, and easier to get 85% because you’re putting more deposit in. You can amend the Decision in Principle and get the mortgage by putting more money in.
So we find out why it’s being declined – not enough credit score? Not enough deposit? Missed or late payments? Once we know why it’s declined, we look for a lender that would accept your circumstances.
What are the benefits of getting an Agreement in Principle with a mortgage broker?
If you’ve gone directly to a bank and they decline an Agreement in Principle, you’ve nowhere to go. They’re not going to help you. They won’t suggest another lender to approach. But that’s what a mortgage broker does.We get to know you and should be able to get you a Decision in Principle. It might be with a lender that you’re not familiar with, or a lender that has slightly higher interest rates – or it might actually be a cheaper lender than you’ve been looking at yourself. That’s where a mortgage broker can help.
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