What is a mortgage in principle?
A mortgage in principle, or an agreement in principle, is a document that shows how much a lender might be willing to lend you. It does not guarantee that you will secure a mortgage, but it does help to give you confidence in shopping for your property and to be realistic in the houses you are looking at, as well as allowing home sellers and estate agents to take you more seriously as a buyer. A mortgage in principle is a useful indication of your ability to get a mortgage and a rough guideline on price.
How reliable is a mortgage in principle?
A mortgage in principle is not a guarantee that the lender will offer you a loan and so should not be taken as 100 per cent reliable. It can be withdrawn at any time for a variety of reasons.
To receive a mortgage in principle, the lender will typically ask for basic information in order to gain insight into your mortgage affordability. However, when they carry out a more detailed fact-finding before providing you with a mortgage offer, they will look at your finances, your credit history, and the property you want to buy more closely, which could make them re-evaluate the mortgage in principle offer they originally gave you. Therefore, you could find that your mortgage in principle becomes an unreliable factor on your ability to get a mortgage or not.
If you only barely meet the lender’s affordability requirements, a mortgage adviser can inform you that the mortgage in principle you have obtained isn’t reliable, and you might want to consider other lenders in case your current lender withdraws their mortgage in principle.
There are many situations where a lender has provided a mortgage in principle and then declined the borrower, but this does not mean the mortgage in principle was unreliable. This is because there might have been multiple reasons why the mortgage in principle could have been approved and then declined including:
- The borrower failed further affordability checks
- A bigger mortgage is required than the initial mortgage in principle was for
- There has been a drop in your credit score since you got the mortgage in principle
- If you were not honest during the mortgage in principle application then the offer is not reliable or a true reflection of your needs
- If you’re currently changing jobs your income might change meaning your mortgage in principle would be inaccurate
- You’re buying a non-standard construction property which could affect your mortgage in principle
- You’re a self-employed borrower and cannot meet the lending requirements
- You have bad credit history (such as bankruptcy, County Court Judgement (CCJ), Individual Voluntary Arrangement (IVA), mortgage arrears or a mortgage default)
- Your financial position has changed significantly during the time between your mortgage in principle offer and the full mortgage application
Is a mortgage in principle a good sign of getting accepted?
A mortgage in principle is a positive sign that you might be able to get a mortgage, but it is important to remember that it is based on the information you have given and not any further extensive checks conducted by the lender.
So, whilst a mortgage in principle might be a good sign that you’re likely to get a mortgage, it is by no means a locked in offer of one.
Does a mortgage in principle affect your credit score?
A mortgage in principle should not have an affect on your credit score if it is only a soft credit check. A lot of mortgage lenders conduct mortgage in principle applications using soft credit checks, but be mindful that there are some like Nationwide that will still use a hard credit check which could have a negative impact on your credit score and limit your ability to get a mortgage with a new lender within a short space of time.
What could go wrong when getting a mortgage in principle?
There is always a chance of something going wrong when you apply for a mortgage in principle such as:
- Being rejected due to not meeting the lender’s requirements
- Your mortgage in principle gets delayed because the lender lacks supporting documents
- Being refused because you don’t have a credit history
Overall, a mortgage in principle can be reliable or unreliable depending on how much information the lender asked you to provide and your level of affordability for a mortgage. If you comfortably received your mortgage in principle, and meet all of the lender’s criteria, you might find that the mortgage in principle offer is more reliable and a more accurate representation of what you would be offered for your real mortgage.
If you have any further questions about mortgages in principle or anything else related to mortgages contact Finance Advice Centre today. Our expert advisers are best placed to help you find the most suitable mortgage products for you as well as provide guidance through the application process itself to give you the best chance of success.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.