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What is a Mortgage in Principle?

Thursday, July 27, 2017

One of the most important steps to take when you set out to buy a home is calculating the mortgage you can afford.

One of the most important steps to take when you set out to buy a home is calculating the mortgage you can afford.

Having a mortgage in principle (MIP) shows that you can, in theory, afford to buy a property, which can make you more attractive to lenders than other prospective buyers.


What is it?

An MIP, also known as an agreement in principle (AIP), is an initial written agreement from the lender stating that it is prepared to grant you a mortgage, as well as the total amount it is willing to offer.

An MIP doesn’t guarantee your loan because it is not a formal mortgage offer. And if the lender later discovers something you haven’t mentioned that harms your ability to get a mortgage such as, outstanding credit card bills, it could change its mind about whether or how much it will lend to you, and what the interest rate will be.


How long does it last?

A lender can issue an MIP in as little as 24 hours, and this is valid for up to 90 days.

If an MIP expires before you need it, you can always reapply. However, be careful about the number of applications you make, as the credit searches each MIP entails could be detrimental to your overall credit score.


Why do you need an MIP?

If you are looking to purchase a house, an estate agent will often want to ensure that when you make your offer you will be able to obtain a mortgage for the amount you require, on top of your deposit.

Having an MIP offers reassurance and ensures your credibility. If you’ve ever been concerned about your credit rating, it can be a relief to know that a lender is prepared to lend to you, and how much.

It also offers credibility, as an MIP shows that you can actually afford a property you like. This can be particularly useful in competitive areas where the market moves quickly.


How to apply for an MIP

As with a full mortgage offer, you can either apply through a mortgage advisor or directly to a lender.

The MIP is based on the initial personal details you provide about your employment status, income, how much you want to borrow and other factors, along with a check by a UK credit reference agency.

At this stage, the lender may not require supporting documents such as proof of your income, but it will be useful to have these available just in case. It’s also likely that the lender won’t go into as much detail about your monthly expenditure as it would with a full mortgage application.

An AIP tends to be free, but there are advisors who charge for providing one, so make sure you confirm whether there will be any cost before making a request.

When you go on to make a full mortgage application, there will be a much more thorough assessment of affordability and your personal circumstances, including income verification.

Although it’s unusual, you may also find that lending criteria change between receiving your MIP and proceeding to a full application.