A Mortgage in Principle – also referred to as ‘agreement in principle’ or ‘decision in principle’ – is primarily a legal lending agreement based on an analysis of the borrower’s income, outgoings, credit history, and other important factors that come into play when securing a mortgage.
A Mortgage in Principle is not a
necessary document, but something you, as the lender, can opt for before
finding a property you would like to apply for a mortgage for.
The agreement, which lasts 60-90 days, involves the lender taking basic information about you and performing an initial assessment to come up with a figure that they would be able to lend, ‘in principle’.
This means that your income, expenses and credit history are analysed to find the highest mortgage as well as the best interest you may be able to get.
Once the mortgage in principle is approved by the lender, you will be given a ‘mortgage promise’, which means that the information you have provided is correct and that the lender would be happy to lend to you.
Why Get a Mortgage in Principle?
Now that we understand what the agreement is, why do you really need it? How does the ‘promise’ of a loan help you with your property or your actual mortgage?
The primary and foremost benefit of this is being a reliable buyer in the eyes of real estate dealers.
Estate agents may sometimes ask you for proof that when you browse a property or offer to purchase it, you will, in fact, be able to afford it. In such a case, presenting your lender’s official promise is a confirmation of your affordability, and directly increase your chances of getting the property you like.
It also puts you in a strong position as a potential buyer; if two parties place an offer on a property and are equal in all things, the seller will most likely go for the one who has a Mortgage in Principle as compared to the one who doesn’t have one.
While it may not make a difference if one offer
or one party is clearly better than the other, it certainly helps add to
profile. In essence, having the agreement on hand adds to your credibility as a
Of course, it also provides you with the personal security of knowing that you have the money for the purchase.
Additionally, it gives you an idea of the price range you should be considering when looking for property to buy. Before you even set out to look for one, you will know your affordability limits.
This is especially beneficial for those worried about their credit history or is unsure whether they will be good enough for the sought lender’s requirements.
Is There a Downside?
While real estate dealers encourage buyers to get a Mortgage in Principle, some experts argue that this might actually damage credit rating, since it may indicate that the borrower is unsure about their own affordability.
It can arguably also be a problem because a credit search by a lender can leave a ‘soft footprint’ or a ‘hard footprint’ on one’s credit file, with the former showing on the credit report as an inquiry and the latter showing as a mortgage application.
One’s credit score may be lowered if there are too many hard footprints. Those against Mortgage in Principle also argue that a mere promise does not guarantee an actual mortgage and that it certainly can not predict the size of the mortgage that will offer.
In other words, it simply may not be detailed enough to become the basis of a practical decision.
To decide whether or not a Mortgage in Principle is the way to go for you, make sure you consult an expert on your specific case and proceed in the best way possible.