Let’s start with a quick definition;
- AIP = agreement in principle
- DIP = decision in principle
Both mean mortgage in principle, but some lenders use different terms.
So, what is a mortgage in principle?
Basically, it’s the first stage of any mortgage application. With a few details we can help you discover what size mortgage is available for you. Getting a mortgage in principle is an effective way to determine your budget before you start looking at houses. And here’s how it works:
Step one
The lenders secure online system will ask for basic details that include, full name, date of birth, address history for the last 3 years, income breakdown, debts to include, car finance, student loans, personal loans, credit cards, store cards, pensions, travel loans, as well as balance details on things like new payment platforms Klarna, PayPal and Creation to name but a few. We also input the target purchase price and loan size along with details of the deposit.
Step two
Once we press submit, the system then carries out affordability checks and the all-important credit scoring. Now, depending on the loan to value of your case the system will run various scenarios to establish a balance.
NB: Credit scoring – for most people it’s fine but if you’ve ever had any sort of issue with a late payment then please speak with us first. Although there are lots of options to check your score this isn’t always required. The score is an indicator of the quality of your accounts, but lenders don’t use the number, they look at the individual elements of your accounts.
What does that mean? The score indicator essentially provides the lender with a risk profile value. The same clients applying for a 90% mortgage may get a lower offer than if they were applying for a 60% mortgage, all based on the risk profile that the lender is using to ascertain the likelihood of a default on payment. There is a lot more we could say about credit scores, but we’ll save that for another blog!
Step three
All the estate agents will ask for a mortgage in principle, but why?
Well, the main reason is that it shows that you as a potential buyer are committed and credit worthy, hopefully proving to the agent that you’re serious about proceeding and in a strong position to do so. There’s nothing stopping you from window shopping, but if you want to start viewing properties, the agent will want to be sure you’re not wasting anyone’s time.
Estate agents will also use this to confirm to the seller that you have sufficient funds to complete the transaction. The AIP/DIP shows your maximum borrowing amount, you may then have to provide the agent proof of funds including deposit.
For example, the AIP/DIP shows a maximum lend of £200,000 and you provide a bank statement to show deposit funds of £50,000. The agent now knows you can afford £250,000, but you are offering on a £225,000 value home…
Step four
Make an offer within 60-90 days!
Most agents won’t even let you arrange a viewing unless you have a mortgage in principle, so it’s always best to speak with us to find out how much you can borrow.
The principle will be valid for between 60 and 90 days, depending on your lender, so when you’re ready to get serious, get in touch with us to put it in writing.
In the meantime, check out our article on the mortgage sales process explaining exactly how it goes.
