When you’re taking those first steps towards buying a house, you’re told to get a mortgage in principle before you start your property search. But “how reliable is a mortgage in principle? Let’s take a look.
What is a mortgage in principle?
A mortgage in principle (MIP), also known as a Decision in Principle (DIP) or Agreement in Principle (AIP), is a statement from a lender indicating how much they’re potentially willing to lend you. It’s often considered a useful first step when you’re house-hunting, as it gives you an idea of your budget and shows estate agents and sellers that you’re a serious buyer.
What affects a mortgage in principle
While a mortgage in principle might make you feel more secure in your property search, it’s not a mortgage guarantee.
A mortgage in principle is a conditional offer based on some basic questions to get confirmation of a mortgage offer you will undergo more thorough affordability checks looking at:
Your credit report a thorough credit check could reveal something that wasn’t initially showing during the soft (credit) search.\
Employment
Your employment status and income are major factors that lenders assess when you apply for a mortgage in principle. How stable your employment is, what you earn, and even your job history can significantly impact your application. Lenders will also be looking at your payslips. Typically, they might ask for the last 3 months’ worth of payslips. However, some lenders require up to 6 months to create a good overview of your earnings.
Freelancers or those with irregular income may find it slightly more challenging to obtain a mortgage in principle. Your income might not be considered as stable as that of someone in full-time employment, which can affect how reliable a mortgage in principle is for your case. As a freelancer, you may need to provide additional documentation, such as tax returns or business accounts, to bolster your application.
Your monthly budget
Your monthly budget is a crucial factor lenders consider when you’re applying for a mortgage in principle. This isn’t just about your income; it’s about your outgoings too. You’ll need to account for essential costs like rent, utility bills, and groceries, as well as lifestyle expenses such as social activities and subscriptions. Lenders want to see that you can comfortably manage mortgage repayments alongside these other financial commitments. So, a thorough review of your monthly budget can make your mortgage application process smoother, and ultimately, more successful.
Property suitability: the lender’s willingness to lend can depend on the type of property and its valuation.
Interest rate changes: a significant change in interest rates, could impact your borrowing ability.
Time limit: most mortgages in principle are valid for 60 to 90 days. If you don’t find a property in that time, you’ll need to apply again for one.
What happens if you’re not eligible for a mortgage in principle?
Being ineligible for a mortgage in principle can feel like a setback so it’s always worth consulting a mortgage broker. There are various reasons you might not get a mortgage in principle:
Poor credit score: one of the top culprits, affecting a mortgage in principle is a poor credit score.
Unstable income: lenders want assurance you can make repayments, an unstable income is not a good sign.
High debt-to-income ratio: if you have debt and you owe a lot compared to what you earn, that’s often a red flag for lenders.
Not passing your mortgage in principle is certainly a bump in the road, but this is also an area where a mortgage broker can step in to assist.
Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
How a mortgage broker can help
Mortgage brokers have expertise in navigating the lending landscape. They can review your financial situation and provide tailored advice on how to improve your eligibility. Other ways they can help;
A wider range of lenders: brokers have access to a wider range of lenders, some of whom you might not have considered. This can improve how reliable a mortgage in principle is in future applications.
Navigating difficulties: a broker can help identify a niche or even specialised lenders if your situation is not straightforward.
Application improvement: a mortgage broker can help by advising you on how to present your application. Thereby improving how reliable a mortgage in principle truly is for you if you do apply again in the future.
While a mortgage in principle can serve as a good indicator, it’s not the be-all and end-all, especially when expert help is at hand.
Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
Reconsider your property goals
If you can’t get a mortgage in principle, it’s not the end of the world. It’s an opportunity to pause and reassess your financial situation and property goals.
Remember, a mortgage in principle is not a definitive measure of your ability to buy a home. Its reliability can vary based on various factors, including your proactive steps towards improving your financial health.
Next steps
If you’ve been unsuccessful in securing a mortgage in principle, a mortgage broker might be able to help. Their expertise can turn around your situation and possibly lead to a positive outcome for your home-buying journey.
Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Individual savings may vary, your savings will depend on personal circumstances.
Last Updated: October 18th, 2023
