Securing a mortgage is a critical step when purchasing a property. However, before diving into a full application, many prospective homeowners opt to secure a mortgage in principle (MIP) or agreement in principle (AIP). This document shows sellers and estate agents that you’re a serious buyer, capable of obtaining the necessary financing. But how do you obtain a mortgage in principle? Here’s a comprehensive guide.
What is a Mortgage in Principle?
A mortgage in principle, also known as a decision in principle or agreement in principle, is a written estimate or statement from a lender stating how much money they may potentially lend you. It’s not a guarantee, but it can provide a useful indication of the amount a lender might agree to lend you for a mortgage, based on some preliminary checks of your credit history and personal income.
Step 1: Evaluate Your Financial Situation
Before approaching a lender, it’s advisable to have a clear understanding of your financial situation. Consider your income, your regular outgoings, any debts you have, and your credit score. All of these factors will influence how much a lender is willing to offer you.
An impressive credit score enhances your chances of getting a good mortgage in principle offer, as it reassures the lender of your reliability in meeting repayments. If your credit score is poor, you might want to consider ways to improve it before applying for an MIP.
Step 2: Understand How Much You Could Borrow
Typically, mortgage lenders will offer between 4.5 to 4.75 times your annual income. If you’re buying with another person, the calculation could be based on your combined income. However, remember that these are rough guidelines and the exact amount can vary depending on individual circumstances and the lender’s criteria.
Step 3: Approach a Lender or Broker
To get a mortgage in principle, you need to either approach a mortgage broker or go directly to a lender. Both have their advantages.
A mortgage broker can provide access to a wider range of deals, some of which may not be directly available on the open market. They can also offer advice tailored to your specific circumstances.
On the other hand, if you already have a relationship with a particular bank or building society, they may be able to offer you a mortgage in principle based on your previous financial behaviour. It can be quicker and more straightforward, particularly if you meet their lending criteria.
Step 4: Provide Your Details
The lender or broker will need specific details from you to provide a mortgage in principle. These include your name, date of birth, current address, income, expenses, and details about your employment. You’ll also need to give them permission to perform a credit check.
Step 5: Credit Checks
The lender will perform a soft credit check to ascertain your creditworthiness. A soft check won’t impact your credit score, unlike a full credit check. It’s therefore crucial to ensure you’re applying for a mortgage in principle and not a full mortgage application at this stage.
Step 6: Get Your Mortgage in Principle
Once the lender is satisfied, they’ll provide you with a mortgage in principle. It will usually be valid for between 60 and 90 days. If you don’t find a property during this period, you may need to get another MIP, and another credit check will be required.
Remember that a mortgage in principle is not a guarantee that you will get a mortgage on a specific property. The actual mortgage offer may be more or less than the MIP, and it can be influenced by several factors such as the property’s value and condition.
Step 7: Full Mortgage Application
Once you’ve had an offer accepted on a property, you can proceed to a full mortgage application. At this point, the lender will carry out a full credit check and a thorough assessment of your financial situation. The property will also need to be appraised to ensure it’s worth the purchase price.
Step 8: Mortgage Offer
If your full application is approved, you’ll then receive a formal mortgage offer. You should review it carefully, possibly with a solicitor or conveyancer, before accepting.
In conclusion, a mortgage in principle can make the homebuying process smoother. It provides an indication of your borrowing capacity, allowing you to house-hunt with confidence. However, an MIP is not a formal mortgage offer and does not guarantee that you’ll get a mortgage. It’s always recommended to seek advice from financial advisors or mortgage brokers to ensure you understand the process fully and get the best deal.
