Agreement in Principle
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Agreement in Principle
Lee and Neezam are back to talk all about an Agreement in Principle and how they work.
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Podcast approved by The Openwork Partnership on 3/6/2024.
What is an Agreement in Principle?
There’s different terminology for an Agreement in Principle – it’s also known as a Decision in Principle, a mortgage promise or Mortgage in Principle. There are many terms for it but in short, it’s a mortgage pre-approval.
Generally it’s an electronic decision. A lender will check your credit and explain how much you can borrow based on your income and outgoings and your credit report.
You haven’t got the mortgage, but it is a really big step towards obtaining one. It means that you qualify and the lender is happy to take on the application.
What should I do if my estate agent is asking to see my Agreement in Principle?
If an estate agent is asking you for an Agreement in Principle it’s in your interest to show them that you have one.
It shows that you’re financially prepared and that you’re taking steps to get advice. You’re a serious buyer. If you have an Agreement in Principle, they’re not going to brush you aside if a more serious buyer comes into the picture.
They know that they’re not going to waste their time taking you to viewings or accepting any offers on a property you want to buy. Don’t forget, an estate agent’s role is to protect the seller and make sure they get the best price possible for the property. They’re not working for you as a buyer. So if you put an offer forward and it gets accepted by the seller, it’s helpful for them to know you’re able to proceed.
How do I get an Agreement in Principle?
You can either apply directly with a bank or with a broker. Some lenders let you do that over the internet, some will require you to go to a branch, some do it over the telephone.
But if you go directly to a bank they will obviously only give you an Agreement in Principle based on their criteria, their affordability assessment and their products.
A mortgage broker has access to multiple lenders and can therefore seek out the lender that’s offering the most competitive deal from those lenders we have access to.
Do I have to have an Agreement in Principle through the estate agent I’m looking to purchase through?
Absolutely not. You don’t need to have an Agreement in Principle through the agent you’re potentially buying from. You may be looking at properties online where there are various different agents. You don’t have to have an Agreement in Principle with the specific agent for a property.
You can go direct to your bank, but if you have a specific set of circumstances, such as being a First Time Buyer, or you’re on a visa, or you’ve got a low deposit, or you’re not quite getting the borrowing you need, it’s really helpful to speak to a mortgage broker like ourselves. You can absolutely have an Agreement in Principle with a mortgage broker, and that would be valid for any house purchase through any agent.
Perhaps your Agreement in Principle confirms that you can borrow up to £250,000, in which case you’ll be looking at properties at that budget. It doesn’t matter whose agent it’s with – or it could be a housing developer – you don’t need to go with their mortgage broker. You’re free to use whoever you like.
How reliable is an Agreement in Principle? How long does this last for?
This is a really important point, because in theory anyone can get an Agreement in Principle with a lender, but the Agreement in Principle Is only as good as the information that’s put into it.
So if someone decided to tell the bank they’re earning £100,000 when they’re actually earning £60,000, then of course they will give you an Agreement in Principle for a much higher figure than what you’d actually get once you apply for the mortgage.
A broker will do all the verification of income, outgoings, affordability, all the due diligence checks and make sure that the Agreement in Principle is as good as it can be. We’re then not going to have any problems when it comes to submitting a full mortgage application.
In terms of how long an Agreement in Principle lasts, that depends on the lender. Most of the time they’re between 30 days and 90 days with the high street banks.
Lenders will always state that it’s an Agreement ‘subject to full mortgage application’. That’s because they haven’t done any real checks on your payslips, bank statements or ID. You still need to prove everything once you apply for the full mortgage.
Can I make an offer with an Agreement in Principle?
Yes – that’s one of the biggest benefits of an Agreement in Principle – it shows that you qualify for the property you’re buying.
We would get you prepared to go viewing properties with that Agreement in Principle, and perhaps start to build a relationship with a solicitor for you. That gets you ready to put an offer in on a property and make you a strong contender, as well, because you’ve already had mortgage advice and have a solicitor lined up. You’ve got that Agreement in Principle.
However, we do often see people who tend to try and do it the other way around. I really would avoid this where possible. Although viewing properties is the most exciting part, you need to really have mortgage advice and an Agreement in Principle before you do this.
We do occasionally have to give someone the bad news that they can’t get a mortgage – but they’ve already put an offer in on a property. Or, they might be very attached to a particular property and find they can’t afford it. It’s much less disappointing to have an Agreement in Principle first, so you know what’s feasible.
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Does an agreement in principle mean you’ll get a mortgage?
Not necessarily. It’s only as good as the information that’s put into it. Most of the time we are able to get our clients approved on a full mortgage following an Agreement in Principle. That’s because we’ve done all those checks.
As long as you can evidence everything you’ve put in for the Agreement, and there are no problems with the underwriting, it should all go through.
We’ll ask if there are any other reasons they won’t want to lend to you, such as regularly exceeding your overdraft limit or things like that, that a bank may not pick up on an Agreement in Principle. So there are additional checks.
Also, it could turn out that the property itself is unsuitable for mortgage purposes. The condition may not be good enough. It might mean that the valuation figure given is actually higher than the bank can verify – that can cause problems. So, there’s no guarantee – it is subject to that full assessment.
Will I need a credit check? Does an Agreement in Principle affect credit score?
The big purpose of the Agreement in Principle is to check that you are creditworthy in the eyes of that particular bank. You need to pass their internal credit score. Every bank will do a credit check on you to ensure that you qualify for the loan you’re applying for.
As we speak today in May 2024, most banks just do what we call a soft credit search. It generally doesn’t impact your credit score. Perhaps a handful of banks do a hard search at the Agreement in Principle stage, and that does impact your credit score.
So if you’re doing this directly yourself, you’ll want to be really careful that you know what kind of footprint you’re leaving.
How do I apply for an Agreement in Principle and how long does this take?
If you’re working with us, we will have an initial conversation called a discovery call to understand your circumstances, your plans, goals, income and outgoings. We’ll explore if there have been any issues with credit in the past and look at your affordability.
We’ll then request some documents from you, just to evidence everything we’ve gone through. If you’re employed, we will look at your last three months’ pay slips and bank statements. If you’re self-employed, that means getting tax returns or company accounts to allow us to verify everything.
We then approach the bank, carry out that assessment and check you meet their lending criteria. We submit a pre-application and most of the time we get an immediate decision. It’s usually a yes or a no, but sometimes we might get a ‘refer’ – which basically means they need to put the information in front of a real human being.
That can take 24 hours or sometimes a bit longer. We can usually turn them around quite quickly – within 24 hours most of the time.
What else do we need to know about getting an Agreement in Principle?
Just really to emphasise that an Agreement in Principle is the same as pre-approval, a Decision in Principle or a Mortgage in Principle – all the different names mean the same thing.
A mortgage broker can get you best prepared and find you the most suitable lender. If you’re a First Time Buyer or you have an unusual set of circumstances, we can really help you. It’s also much better than going down the high street and applying for five different Agreements in Principle – that can happen, but it doesn’t look great.
A mortgage broker can pinpoint straightaway which bank is the most suitable based on your situation. I do find that an application with a broker carries a bit more weight. While there are a few customer-facing sites where you can punch in your own information and get a response back, they’re not highly reliable, in all honesty.
We can get you best prepared to put that offer in on that property – and part of that is getting that Agreement in Principle with the most suitable bank based on your situation.
Approved by The Openwork Partnership on 3/6/2024.
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