An agreement in principle (AIP) or also known as a decision in principle (DIP) is the mortgage amount a lender is likely to offer after conducting a credit search and credit score based on a limited amount of information provided by you.
It is not requirement of a lender to have an AIP before your application and you could also speak to a mortgage broker initially to look at your income and expenditure figures to see how much you can borrow. The following are some of the benefits and risks of an agreement in principle:
| Benefits of an agreement in principle |
|---|
| Gives you the confidence of a mortgage offer before starting your property search |
| It demonstrates to an estate agent you can obtain a mortgage |
| If you have had credit issues it shows you can secure a loan from a lender |
| Too many lender AIPs could damage your credit rating |
| An AIP is not a guarantee that a full application will be accepted |
| After securing the AIP other lenders may subsequently offer better deals |
The benefit of an AIP is that it can give you a certain peace of mind that your finances are sufficient to secure a mortgage and can be conducted at any stage before making your mortgage application. The AIP is not a guarantee that you will receive a mortgage or the amount that can be offered.
Even so when you are looking for a property to buy an estate agent would appreciate you having an AIP as it shows you can obtain a mortgage when you make an offer and more likely to proceed to completion.
If you make an AIP with one lender as they offered an attractive mortgage deal at the time, you may find it takes two or three months before you make an offer on a property and there are now other better deals on the market forcing you to change.
When you make a full application the lender will require more information about your income and expenses and this could lead to a different decision. Every time you make an AIP it leaves a record of the credit search on your credit history and if you have too many of these could count against you.
If you are a first time buyer and borrowing close to your income multiple limit, have concerns about your credit history or have a short credit history you may wish to have an agreement in principle before you start your property search.