Mortgage in principle: what can go wrong?

If you’re looking to buy a property, getting a mortgage in principle is an important first step, but it’s not a guarantee. We look into the potential pitfalls and considerations. 

What is a mortgage in principle? 

Firstly, a mortgage in principle (MIP) is also known as an agreement in principle (AIP), or a decision in principle (DIP).  

It’s an agreement from a mortgage lender confirming that they're prepared to lend you the money to buy a property, based on some initial checks such as an identity and credit check. A mortgage in principle could put you in a better position when you make an offer on a property (they’re compulsory in Scotland).  

So, what could go wrong? 

Your application could be declined 

Even though the initial checks are pretty basic, your application for a MIP could get rejected for a few reasons. Not being on the electoral roll at your current address could mean that you fail the identity check. If you don’t have a large enough deposit, the loan-to-value could be too high for the lender, or it could be as simple as incorrectly filling out the application form. 

Most lenders will only do a soft credit search when you apply for a MIP, but some lenders will perform a hard search. If a lender did a hard search on your credit file and then declined you, your application with the next lender will show their hard search, which isn’t ideal. 

Your mortgage application could get rejected 

Getting a MIP isn’t a guarantee that you’ll get a firm mortgage offer, it’s just an indication of what the bank would be willing to lend.  

When you apply for a mortgage afterwards, the lender could still decline your application.  If your circumstances have changed since you received the MIP, then the lender might change their mind on your MIP. Changing jobs, running into debt, or your credit score going down could all be reasons why your application could get turned down. 

Your mortgage in principle could expire before you find a property 

MIPs don't last forever, so it's a good idea to wait before you apply for one until you're serious about finding a property. It varies between lenders, but they tend to last between one and three months.  

If you've don't find a property before your MIP expires, you'll have to renew it, which means going through the initial checks again. 

You may end up needing a bigger mortgage than your MIP 

Once you’ve found the house of your dreams, you might end up needing to make an offer higher than what you got offered on your MIP. You'd have to go back to the lender to see if they could lend you more, which will involve more checks with no guarantee of success.  

For this reason, it's worthwhile getting a mortgage in principle for as much as you can initially. 

How to improve your chances 

If you want to improve your chances of getting your mortgage in principle accepted, there are several things to do before you apply. 

1. Check your credit report with all three credit reference agencies, addressing any errors or information that puts you in a bad light. If you’ve missed payments due to illness, you can make a notice of disassociation to explain what happened.  Lenders are obliged to read a notice of correction, but they don’t have to act on them. 
2. Make sure your credit utilisation rate is around 30%. This means only using 30% of your available credit. If you’ve used more than this, lenders might think you’re relying too heavily on credit. 
3. If you've recently changed jobs, it's best to wait around six months before applying for a MIP, as any lender will want to see a stable income history.
4. If you've previously had a joint account with someone else, check you're no longer associated with them on your credit file. If they have a poor credit rating, it could affect you negatively. You should settle and close the account before you write to the credit reference agencies and ask for a notice of disassociation. 

If you think you could improve your credit report and you’re not in a hurry to move, then it's a good idea to wait before making a MIP application.  

Read more about how to improve your credit score.