Sian Hiatt, Sales Manager, gives us the lowdown on mortgage in principles to help home buyers better understand what they are and why they should obtain one...
Estimated reading time: 7 minutes.
If you’re looking to take your first step onto the property ladder you’ve probably heard about a mortgage in principle. If your search has only just begun and you haven’t heard the term being mentioned, then you soon will!
Most likely from an estate agent, mortgage provider or broker.
There are sure to be many questions that first-time buyers will have about the whole home-buying process, some of which will centre around what a mortgage in principle is, why you need one, and how long they are valid for.
The information related to mortgage in principle queries is the focus of this article so hopefully we can provide you with some answers to your questions!
A mortgage in principle is an agreement from a mortgage lender that outlines just how much they are willing to lend a buyer for the purchase of a property. A mortgage in principle is often abbreviated as MIP and is sometimes referred to as a decision in principle or an agreement in principle.
The amount that the lender believe they will offer to a buyer will be based on documentation and information that the buyer provides, but the mortgage will still need to be underwritten before any full and formal mortgage offer is made.
Read: Check out our helpful buying guide to learn more about the home-buying process
There are no legal requirements for a buyer to obtain a mortgage in principle while home-hunting, but there are certainly many reasons as to why it can make sense for a buyer to do so.
Some of the main reasons a buyer might want to obtain a mortgage in principle are as follow:
Ideally, a buyer should look to obtain a mortgage in principle before even viewing any properties. This is because the MIP will provide them with an accurate idea as to how much they will be able to lend, and when combined with their deposit, this will ensure they search for and view properties that they know they can afford. It saves them from falling in love with a dream property that they later find out they couldn’t afford anyway.
Read: Learn more about mortgages with our mortgage guide
Most lenders offer a mortgage in principle agreement free of charge, so you shouldn’t be expected to pay for one.
Mortgage brokers who search the market to compare mortgage products for buyers also tend to obtain MIP’s on behalf of the buyer free of charge, and only charge once a full mortgage offer is received. Though this is typical practice, it is still worth double checking with any mortgage lenders or brokers you approach.
A mortgage in principle does involve the lender running a credit check against the borrowers, but how these are performed can vary from lender to lender. There are two ways in which a credit check can be done - a soft search or a hard search. The search type that is chosen will depend on the lender.
A soft search is a quick glance at the borrowers credit history and leaves no trace. No other lender will be made aware of any previous applications that have been done with a soft search and this type of search should have no affect on the credit score.
A hard search is a more in-depth and detailed look into the credit history of the borrower and does leave a footprint on the credit file. Hard credit searches don’t directly affect the credit score, but they are visible and could potentially affect any full mortgage applications further down the line - especially if several hard searches are performed by many different lenders in a short space of time, as this can look like the borrower has been recently rejected for credit.
A mortgage in principle gives a buyer a firm idea of what they can afford when searching for a property, but it certainly doesn’t guarantee that a full offer will match the principle offer. This is because during the application for a full mortgage offer, many more detailed checks will be made - such as the hard search we mentioned previously, and proof on income and regular expenditure etc.
This makes it extremely important for a buyer to be honest about their financial status when obtaining a mortgage in principle, otherwise the principle offer won’t be accurate, and you may find you’re actually offered a lot less when it comes to the full application.
Documents that lenders typically ask a borrower to provide during the mortgage in principle process include:
A borrower can certainly be rejected for a mortgage in principle if the lender deems them to be of sufficient risk, though that doesn’t instantly mean it’s the end of the road. The borrower can still approach other lenders, or a broker who will be able to recommend which lenders may be most suitable in their particular situation.
The borrower can also begin to make changes to their finances so they are in a better position when next applying - which is something a borrower should be doing anyway, particularly if they are turned down for a MIP.
The main reasons a lender may reject a mortgage in principle are:
In most cases, a mortgage in principle will last somewhere between 60 to 90 days, but this will vary between lenders.
If the validity period of your offer lapses, renewing it is usually straight forward, unless your circumstances have changed (income, new debt etc.) or if there is a shift in the economy as a whole (change in interest rates etc.).
Are you on the lookout for a property in Cardiff? If so, CPS Homes are here to help. Our expert sales team have been helping people onto the property ladder for over 20 years, and we’d love to be of service to you as well. Get in touch to find out more about how we can help by calling 02920 668585, e-mailing email@example.com or by popping into one of our three Cardiff based branches.