As a part of your hunt to find the right mortgage for you, you might have come across the concept of a "mortgage in principle" - which can also be termed a decision in principle (DIP), or an agreement in principle (AIP).
The terminology may change, but ultimately they mean the same thing. A mortgage in principle is a core element of getting on the property ladder or re-mortgaging your property.
What is a mortgage in principle?
A mortgage in principle is, quite simply, a statement from a chosen lender which confirms they are willing to lend you a certain amount of money. This is usually sought out before the purchase of a home is finalised, to show that you have the means to actually purchase the house. However, a mortgage in principle can also be applied for if you're looking to re-mortgage your property, as you're ultimately taking out a new loan.
A mortgage in principle is a necessity if you're buying a home in Scotland; however, it's always beneficial to get one to make the buying process that much smoother.
What is a mortgage in principle for?
A mortgage in principle is a statement provided by your lender indicating their willingness to lend you the amount of money you're looking for to buy a property. This gives the current owner of the house the extra peace of mind that you're a serious buyer. A mortgage in principle may work particularly in your favour if there are multiple interested parties looking at the same property - the owner is highly likely to favour a prospective buyer able to demonstrate clear means to pay.
A mortgage in principle is also a handy guide if you're unsure about your credit score because it gives you an idea of your lender's assessment of how well you'll be able to afford your repayments.
How to get a mortgage in principle
The simplest way of getting a mortgage in principle is to simply apply for one. The majority of mortgage lenders will be able to offer you a mortgage in principle, so it's up to you to shop around and find the best deal for you. A good way of finding the right lender for you is to use a comparison website, or ask around your social circle for recommendations - you could also ask your estate agent if they can put you in touch with their preferred lenders.
On your application, you'll be subjected to a general financial background check. All lenders will check your financial history to a different degree; however, it's usually a much less intensive check than that for a mortgage. If your credit history is acceptable and you can demonstrate your ability to comfortably afford your repayments, you stand a good chance of being granted a mortgage in principle.
As with all mortgage lenders, it's important to find the feedback of people who currently have or have had mortgages through them. Search out as many reviews as possible, to help assess each lender you're interested in and determine how suitable they are for your circumstances.
How long does a mortgage in principle last?
A key thing to remember about a mortgage in principle is that they don't last indefinitely - the exact duration will vary from lender to lender, but in general, it will be anywhere between sixty and ninety days. It's also important to keep in mind that if you have been granted a mortgage in principle which expires, you are not automatically guaranteed to be granted another one.
The lender's right to refuse
Always keep in mind that, as the name suggests, a mortgage in principle is only ever offered in principle - the lender reserves the right to refuse the mortgage for certain reasons. Usually, if your financial circumstances change, or further details emerge about you which were not a part of a more detailed financial background check. So, when you get a mortgage in principle, you need to act quickly if you want to make sure that you have the best chance of the lender honouring their decision.
What are the benefits of a mortgage in principle?
There are two main reasons that applying for a mortgage in principle is worthwhile.
Becoming a more appealing buyer
A mortgage in principle shows to a seller that you can afford to honour your offer on their property. This will ultimately make you a far more appealing prospective buyer and could give you a very clear edge if there are multiple interested parties looking at the same property. All sellers want as quick and easy a sale as possible, and a mortgage in principle indicates you're both serious about your offer and that you can buy relatively quickly.
Extra peace of mind
Your credit history may be a cause for concern if you're searching for a property to buy. You might not be sure whether or not you'll even qualify for a mortgage, much less be able to afford one. A mortgage in principle is a helpful measure of your suitability for a mortgage and your relative financial situation - which can provide you with some extra confidence about your financial situation.
What do you need to be aware of?
When you search for a mortgage in principle, what should you keep in mind?
They're not a guarantee
A mortgage in principle is simply a general statement about your suitability for a mortgage - it's not binding in any way. On application for a mortgage, you may be subject to a more involved credit check, which may lead your lender to rescind their offer of the money. You may also find that interest rates, fees, and offers have all changed by the time you come to apply for the mortgage properly.
Credit impact
Different lenders will leave a soft or hard imprint on your credit file. Several hard imprints, in the form of searches, on your credit history in a relatively short space of time may give the wrong impression to other lenders. Make sure to ask your lender as a part of your application whether their search of your credit history will leave a hard or a soft footprint.
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