In this post, we look at what a decision in principle means and the implication of this agreement for home buyers.
Does a decision in principle guarantee my mortgage?
A decision (or ‘agreement’) in principle is a certificate that prospective property buyers can obtain from their preferred lender that provisionally states that they would be willing to lend the money needed to buy a property.
The agreement is based on the provider’s own lending criteria and the information presented to them by the buyer and is typically valid for anywhere between 30 and 90 days. However, while it provides a good indication, it should be noted that a decision in principle does not guarantee that the buyer will be able to go on to secure a mortgage as most lenders will need to conduct further financial checks following a full mortgage application. Sometimes, in a small number of cases, a different decision could be made based on their additional findings.
There are numerous reasons why a mortgage provider may not undertake their initial agreement, with the main reason being withheld information; i.e. further down the application process, the applicant is unable to provide evidence for the details originally provided.
Other reasons might include:
- The property is found to be unacceptable for a mortgage
- The borrower’s financial circumstances have changed
- The borrower’s credit history has changed
- The mortgage provider’s criteria has changed
If, on the other hand, the borrower’s circumstances change for the better by the time they submit their full mortgage application, the lender may offer a larger loan than originally agreed. However, it’s vital that borrowers ensure they can afford any increase in mortgage repayments by budgeting accordingly.
Do I need a decision in principle before I make my offer?
A decision in principle is not essential when making an offer on a house, but estate agents and sellers are often more likely to accept offers from those that already have a decision from a lender as it reduces the chance of delays in the selling process. Having a decision in place is a good way of validating an offer on a property, which can be difficult for prospective buyers to otherwise demonstrate.
Will a decision in principle impact my credit score?
Most (but not all) decision in principle checks are recognised as an ‘enquiry’ rather than application. The credit search leaves what is referred to as a ‘soft footprint’ on the credit file and will not impact credit scores at all, as it will not be seen by other organisations carrying out a search. However, depending on the lender and the level of information they need to access to provide a decision in principle, in some cases they may leave a ‘hard footprint’ on credit records, which can affect its score as other lenders can see this information. The selected lender will be able to advise whether their methods will leave a footprint or not.
Several ‘footprints’ left within a short period are a concern as they can affect mortgage providers’ decision to lend. This is because it can be interpreted as the prospective buyer is applying for credit with numerous providers and failing to access it, or that they’re planning to take on large amounts of credit in a short space of time. For that reason, it’s worth trying to minimise the number of providers approached for a decision.
While a decision in principle is not compulsory, it can be a useful service for homebuyers. It may allow them to edge ahead of the competition when putting in offers on property or offer peace of mind to those that have concerns about their credit history or the amount they can borrow to secure that dream home.
Aldermore is a British bank that understands how difficult it can be for first time buyers to secure the home of their dreams. By providing a strong underwriting process that assesses every mortgage applicant on a case-by-case basis, the bank may be able to help first-time buyers with a variety of unique circumstances.
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