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What is a mortgage Agreement in Principle and do buyers need one?
Getting a mortgage can be a daunting prospect – it’s probably the biggest and most expensive contract you’ll ever sign up to. There’s a lot of uncertainty. Will you be accepted? Will your credit history let you down? Will you be able to borrow enough to afford the property you want?
While you never know the answers to these questions for certain until you formally apply for a mortgage, there is a document you can get to give you a rough idea of how your application could go.
A ballpark figure
This document is called an Agreement in Principle and it can provide a useful guide to buyers of the price of potential home they should be looking at.
It outlines how much a lender could be willing to lend you based on the information you have provided (things like income, outgoings and where you’ve lived for the last three years). The agreement comes under many names, so don’t be surprised if it’s called something else like a Decision in Principle or a Mortgage Promise.
Whatever your potential lender chooses to call it, make no mistake - this is not a legally binding contract and is no guarantee of what you’ll eventually be able to borrow. So when you come to apply, don’t rely on getting the amount that’s suggested – an Agreement in Principle isn’t actually a promise that you’ll get a mortgage at all.
When it comes to the crunch, even if a lender has issued an Agreement in Principle, they’re not bound to offer you a mortgage and, unfortunately (sorry to point out the obvious), by definition it is ‘in principle’.
If it’s not binding, why do people do it?
You’re right to question why you’d bother getting an Agreement in Principle – if it doesn’t stand up when you come to apply for the mortgage, then what’s the point? But having one can make you a more appealing potential buyer, especially if there is other interest in the home you have your eye on. It shows you’re serious about buying the property and lets the seller know that, ‘in principle’, you can access the funds you need if you were to go ahead. Having an Agreement in Principle may therefore give you a leg up over someone who doesn’t have one.
Bear in mind though, to issue an Agreement in Principle lenders will carry out a credit search. So if you’re already a bit unsure that your credit history is up to scratch, you may be wary of getting an additional mark on your credit rating by obtaining this document.
Should I bother?
In addition to making you an attractive candidate in the eyes of the seller, an Agreement in Principle is also good for giving you a rough figure of how much you’d be able to borrow. This means you have something to work from when looking for properties.
The agreement is free and can put you in better stead as a potential buyer, which is why estate agents can sometimes ask that buyers get this document.
If you’re not bothered about the lender carrying out a credit search and you want something in writing – although remember, not binding – to work from, an Agreement in Principle is certainly worth obtaining. But ultimately, there’s no guarantee that it will bag you the home you want.