Get a Mortgage Decision in Principle

Decision in principle
Get a Mortgage Decision in Principle
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Before commencing your property search, it is best practice to get your mortgage agreed in principle. Your mortgage broker will work out how much you can borrow and provide indicative rates and the monthly mortgage cost enabling you to commence your house search fully informed of your mortgage options. Fall in love with the numbers first and the property second.

It’s all about preparation, which we have covered in: The 7 habits of highly effective mortgage seekers.

Estate agents expect you to have arranged your mortgage in advance, before making an offer on a property, and some won’t even allow you to view until you’ve confirmed your mortgage status.

Ironically, you cannot actually get a mortgage until you have found a property. But, you can obtain a mortgage decision in principle (DIP, also known as an agreement in principle (AIP)). This is when a lender conducts a credit check and, subject to your credit being satisfactory and passing their credit score, they will confirm how much they will lend you. Some lenders issue a DIP/AIP certificate: a one page certificate-like document stating the name of the bank, your name, agreed mortgage amount, and the documents required to process your mortgage application.

Obtaining a DIP/AIP does not mean that you will obtain a mortgage offer (in other words, it’s not a final mortgage approval). It’s simply a lender saying that, so far, you’ve passed the first hurdle and, provided that everything else is evidenced and satisfactory: income, payslips, bank statements, affordability, proof of deposit, identification, property, etc., they will lend you the money to buy the property. As you can see, there are still a few hoops to jump through before your mortgage is finally approved.

So, what’s the point of a DIP/AIP? It demonstrates you have reasonably good credit and, all things being equal, that the probability of securing a mortgage is high. It’s for this sole reason that estate agents expect you to have a DIP/AIP to ensure that they are not dealing with time wasters. Remember, estate agents work for the seller, not the buyer, and their job is to sell the property, which involves introducing “qualified” buyers to the seller.

However, if you haven’t found a property, completing a lender DIP/AIP is an absolute waste of time and should be avoided at all costs. Typically, DIPs/AIPs are only valid for 30 days (at most three months), and if you haven’t found a property during this period, it means doing another DIP/AIP, which involves another credit check and another unnecessary foot-print on your credit file.

Too many credit checks will lower your credit score and could impact your ability to pass the credit score with alternative lenders whose rates might be more competitive at the time you’ve found your property. Some of the lenders with the best rates also have the most sensitive credit scoring systems. Having repeated DIPs/AIPs done is an untidy way of doing business and for this reason experienced brokers don’t bother with them. DIPs/AIPs are only applicable if you have unusual circumstances and your broker feels that it’s necessary to complete one to enable you to commence your property search.

So, what is the correct approach in the absence of a formal DIP/AIP from a lender? All you need is confirmation from your mortgage broker that, based on your income and credit status, they will be able to obtain a mortgage for you. This is a verbal DIP/AIP and should suffice prior to you finding a property and your offer being accepted by the seller. This is a much neater way of doing business. If you have exemplary credit, then you don’t need to do a lender DIP/AIP.

In completing the fact find, an experienced broker will be able to advise you of your mortgage options and the onus is on you to impress upon the estate agent (if buying) that you’ve arranged your mortgage and that once your offer is accepted, your broker is in a position to proceed to the valuation instruction stage (submit your mortgage application to the lender). Give the agent your broker’s number so that they can make contact to confirm your mortgage status.

Your broker will have the wherewithal to convince the agent that you have been mortgage qualified and they are competent to progress your mortgage application to offer stage (final mortgage approval). No credit checks are carried out at this stage and, provided you’ve been completely honest and transparent with your broker, you should obtain your mortgage offer. This is the ideal position and all property buying transactions should be conducted on this basis.

Dear Estate Agent: This is a win-win for all parties. There is no point in everyone doing repeated DIPs/AIPs, as it invariably impacts their credit score and credit worthiness. Surely, to ensure there is liquidity in the market, it’s in everyone’s interest to ensure that buyers have exemplary credit, which means more money is available to buy the houses you’re trying to sell.

Let’s summarise the verbal DIP/AIP process:

Your broker reviews your credit file and conducts a mortgage fact find to confirm that you are eligible to secure a mortgage. Most importantly, you have provided all the information and documents to your broker, in order to enable them to proceed to full application once your offer has been accepted.

You inform the estate agent that you have arranged your mortgage and they are free to call your mortgage broker to confirm that you are a fully prepared, serious professional buyer.

Once you’ve found a property and you’re pretty confident of your offer being accepted by the seller, inform your broker of the purchase price and property details.

Your broker will then proceed to obtain a DIP/AIP. It takes about thirty to forty-five minutes to obtain an on-line DIP/AIP from a lender. Once pre-approved, your broker will update you accordingly.

Once the agent confirms that your offer has been accepted, inform your broker to proceed to full application, i.e., submit an application to the lender and get the valuation instructed. Because your broker has all the information at hand, they can submit an application immediately. Your broker will inform you of any additional documents that they may need, e.g., latest payslips, bank statements, etc.

Your broker will inform you of the lender’s time scales to get the valuation instructed and obtain the mortgage offer. It’s good practice to inform the agent of these dates to ensure that you are on the same page with the seller’s expected completion time scales. From here onwards, it’s all about communication and working as a team to ensure any bottlenecks are dealt with.

Note: the broker does not provide any financial information to the agent about your circumstances, apart from the fact that you have been approved for a mortgage with a lender. Data protection, confidentiality, and compliance prohibit any exchange of information to third parties. In London, where there is a high demand for quality properties and as a result a sale goes to sealed bids, then you may have to waive your right to confidentiality and sign a letter to the effect, stipulating your broker is at liberty to discuss information with the agent.

When should you obtain a lender DIP/AIP?

If it’s a non standard enquiry or complex case: Non standard could include scenarios such as looking to purchase a timber framed property, a local authority flat on the 29th floor, being self employed with six months accounts, or having minor to adverse credit. In this scenario, the onus is on your broker to find the appropriate lender that will consider lending. Once your broker has identified a lender, they will inform you accordingly and you can commence your property search, knowing that your broker has been able to secure a “mortgage agreement in principle” with a lender.

Please note that not all lenders credit score; some niche lenders will simply carry out a credit check and, if satisfactory, will inform your broker that they will consider lending to you. In other words, there is no computer generated DIP/AIP certificate per se, but simply old fashioned traditional bank manager confirmation. In the current world of on-line banking, you might think that this type of verbal DIP/AIP is actually the weaker of the two, but in reality it’s the strongest DIP/AIP you can obtain. I have covered non-standard mortgage cases under complex circumstances.

 

 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.

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