What is a mortgage in principle?
Navigating the world of property buying can be challenging, especially for first-time buyers. One term that often crops up during this journey is a 'Mortgage in Principle' (MIP), also known as a 'Decision in Principle' (DIP) or 'Agreement in Principle' (AIP). While these terms might sound complicated, understanding what a Mortgage in Principle is and its role in the homebuying process can provide you with a significant advantage. In this blog, we'll talk about what this means to people in the UK.
What is a Mortgage in Principle?
A Mortgage in Principle is a certificate or statement from a lender indicating that they would 'in principle' be willing to lend you a certain amount of money towards buying a property. This is based on basic information about your income, expenditure, and creditworthiness. While an MIP is not a guarantee of a mortgage, it's a useful tool in the homebuying process for several reasons.
Why Get a Mortgage in Principle?
Budgeting
Knowing how much a lender may be willing to offer can help you focus your property search on homes within your budget.
Credibility
Possessing an MIP shows estate agents and sellers that you're a serious buyer, which could give you an edge in negotiations or in a competitive market.
Speed Up the Process
Having an MIP in hand can speed up the formal mortgage application process since you've already gone through initial checks.
How to Get a Mortgage in Principle
Choose a Lender
Research various mortgage providers - banks, building societies, or specialist lenders - to find one that offers terms that suit your needs.
Provide Basic Information
The lender will require basic financial information, such as income, expenses, and debt. They'll also perform a 'soft' credit check that won't affect your credit score.
Approval and Documentation
If successful, you'll receive the MIP, usually valid for 60 to 90 days. It will state the amount the lender is potentially willing to lend you and under what terms.
Limitations of a Mortgage in Principle
Not a Guarantee
An MIP is not a guarantee that you'll get a mortgage. The actual mortgage application involves a far more detailed assessment, including a 'hard' credit check and a valuation of the property you wish to buy.
Temporary
An MIP is typically valid for a limited period, usually 60 to 90 days. If you don't find a property in that time, you may need to go through the process again.
Can Affect Credit Score
While obtaining an MIP involves only a 'soft' check, repeated applications could flag you as a higher-risk customer. However, this is generally not a concern unless you're making multiple applications in quick succession.
What Happens Next?
Once you've found a property and had your offer accepted, you can proceed to the full mortgage application. The lender will conduct a 'hard' credit check and commission a valuation of the property. If all checks are successful, you'll receive a formal mortgage offer.
Conclusion
A Mortgage in Principle is a helpful step in the UK home buying journey, offering both practical and psychological advantages. While not a guarantee of a mortgage, it gives you a clear idea of your budget, makes you a more attractive buyer, and can streamline the mortgage application process. Make sure you understand the terms and conditions, and limitations, of your MIP, and consult with a mortgage advisor to explore the best options for your financial situation.
Your home may be repossessed if you do not keep up repayments on your mortgage
Approved by In Partnership FRN 192638 November 2023