A Mortgage in Principle is an agreement that a lender grants after the thorough analysis of the borrower’s income, outgoings and credit history.
It is an optional document borrower can apply for before looking for property. Many deem it as a useful step since a Mortgage Agreement in Principle (AIP) serves as a kind of a promise from the lender’s side.
In essence, it is the lender affirming that they have
evaluated the potential borrower’s application and credit file, and then they
would be happy to lend a certain amount of loan if the borrower was to find a
property of their liking.
While some argue against getting an AIP since it makes its way in the credit history and may have a negative impact in certain situations, most believe it is majorly beneficial.
If you are looking for property, you can, for one, differentiate yourself from others looking at the same property. In a situation where all other factors including the offer are the same, a seller is likely to pick someone who comes with an assured payment plan.
An AIP from a lender tells the seller or the real estate agent that you are not only able enough to pay for the property but also serious enough to have gone an extra length to gauge your affordability.
Since the lender also advises on how much they would be willing to lend, it also allows you to confidently place an offer on a property you like, while also simultaneously building a relationship with the lender.
The duration of an AIP
While it may vary from lender to lender, a Mortgage in Principle usually lasts between 60 and 90 days. Some may limit it to 30 days, though it is easily renewable.
Some experts argue that you must not get an AIP too soon, since it might expire long before you find a property you would like to place an offer on, and that might mean multiple renewals.
While an AIP itself would not damage your credit history, multiple ones may occasionally reflect poorly. Some estate agents tend to rush potential buyers into getting an AIP, but it is for you to decide when to get one.
It is generally advised that you get one when you are somewhat familiar with the market and know what kind of property you are looking for, and in what price range, so that you are likely to find a property within the time frame, or would not need more than one renewal.
How to obtain an AIP?
The process of getting a Mortgage in Principle involves finding a lender who is willing to make such an agreement in the first place.
This is then followed by providing information to the lender: your employment, income, outgoing expenses, debts, credit score, etc. It is essential that this information is provided honestly and accurately.
The lender then runs a credit search and analyzes whether or not it is safe for them to lend to you, and how much they would be willing to lend if they do.
Once the final decision is agreed on by the lender, they provide the AIP document, also known as a mortgage promise, that can then be presented to real estate agents or directly to sellers.
While there is no guarantee that an AIP would translate into an actual mortgage, most dignified lenders will not back from their word given that your information or circumstances have not changed.
If you run into financial difficulties, it is likely that a lender recants their offer. However, they may also revert to it if you get back up on your feet soon and are able to afford the mortgage again.