Mortgage in principle
A mortgage in principle (MIP) and an agreement in principle (AIP) are certificates showing how much you can afford to borrow.
Lenders and brokers sometimes use the terms “AIP” and “MIP” interchangeably, but they’re different documents and they help you in different ways:
- An MIP is the most basic check of what you can borrow. It can be as simple as putting in some details into an online calculator, and getting an amount in seconds.
- An AIP usually only happens when you’ve found a property. It’s a statement from a specific lender saying they’re happy to lend you a certain amount of money to buy that property.
Neither is compulsory, but many homebuyers find them useful. In this guide we’ll go through some of the detail, and explain more of the differences between MIP and AIP.
What is a mortgage in principle?
Lenders and brokers sometimes say “mortgage in principle” and “agreement in principle” like they’re the same thing. While it’s true they’re both checks of what you can afford, and both give you a certificate, they happen at different stages and help you in different ways.
Mortgage in principle (MIP)
An MIP is the most basic check of what you can realistically borrow. You can get one before you start searching for properties, with just a few details about your income and deposit. There’s no credit check. An MIP shows sellers that you’re likely to be approved for a mortgage, so could help you stand out from other buyers when you’re making an offer. You can get an MIP from a broker, lender, or even an estate agent’s own broker.
Agreement in principle (AIP)
An AIP a statement from a lender saying they’re happy to lend you a specified amount of money to buy a specific property. You’ll need to send more documents to the lender, and have a credit check – but the result is a more accurate estimate of what you can borrow, and more certainty that you’ll be approved for a mortgage. You’ll get your AIP from a lender, though a broker can get this on your behalf.
Usually, you only get an AIP once you’ve found a property you want to buy, though if your credit is on the edge and you want to check your credit before you look for properties, you can.
They’re not a promise
Neither an MIP or AIP are a contract. Neither one guarantees you’ll get a mortgage. You’ll still need to go through the full mortgage application process – a far more detailed check of your finances – and you might still be rejected.
Are they compulsory?
Nope. You don’t have to get an MIP or AIP. If you find a property you like, you could in theory go straight to a full mortgage application – but you’d need to be extremely confident about what you can afford, because that will include a hard credit check.
How to get a mortgage in principle
If you just want a rough estimate of how much you can borrow, you can get that quickly and easily from either a lender or broker, using their online calculator.
You won’t need any documents. You’ll just need to know:
- Your income
- How much you have in savings
- How much you’d like to put down for a deposit
- (Optional) the approximate cost of the property you might buy
- (Optional) some broad estimates about your monthly spending
Getting an MIP can take just a few minutes. Just put in your details and you’ll get an instant figure for how much you can borrow, sometimes with a certificate confirming that too.
How to get an agreement in principle
Once you’ve found a property you like, you can get an agreement in principle for a loan on that property. You can get this directly with an individual lender (a bank or building society), or use a mortgage broker. Both of these should be free.
You can apply online in 20 minutes if you have your paperwork to hand. Then you either submit it to your lender, or your broker will choose a lender and send it to them for you. You’ll usually get a decision that same day – it can actually take as little as 15 minutes – with a certificate or written confirmation as proof.
It’s a good idea to use a broker (though make sure they’re whole of market) as they open up your access to all the lenders on the market, and match you to the right lender for you.
The documents you’ll need
At AIP stage, lenders will ask to see some documents. Some lenders ask for more detail than others, but here’s what you’ll most likely need:
- Proof of ID, like a valid passport or driver’s licence.
- Proof of address like utility bills or council tax bills, and address history for the last 3 years.
- Proof of income: 3 months of payslips, plus any proof of overtime, commission and bonuses.
- If you’re self-employed you’ll usually need your past three tax calculations or two years’ company accounts. If you haven’t been trading that long, you’ll need whatever you have plus proof of your income from before.
- If you started a new job less than a month ago, you’ll need your employment contract, and maybe payslips from your previous job too.
- If you’re on parental leave you’ll need a payslip from before you left, plus a return to work letter from your employer confirming the date you’ll go back to work, and what your income will be.
- Bank statements and details of your outgoings for the past 3 months, like loan payments, credit cards, utility bills and so on.
How do lenders decide whether to offer an agreement in principle?
Lenders look at all sorts of factors when you apply, and each will have different priorities when it comes to the detail.
But three things they’ll always check are your credit history, salary, and employment status.
Your credit history
Lenders will give you a credit check to see how you’ve managed your money in the past – and use it to decide how likely you are to pay back your mortgage.
If your credit history isn’t blemish-free, don’t panic. A missed mobile phone payment on your record won’t stop you getting a mortgage. A string of CCJs is a different matter – ask your broker for advice before you apply.
Your LTI (loan to income)
Your LTI is your salary multiplied by somewhere between 2 and 5. Lenders use it as a rough starting point for how much you can borrow, then refine that by looking more closely at things like your job. They tend to favour people who’ve been with the same employer for a while over those who’ve just started out somewhere.
Your LTV (loan to value)
Your LTV is written as a percentage. It’s the size of your mortgage as a percent of the total property value.
Example: Say you want to buy a property worth £250,000. You have a deposit of £20,000 already, so you need to take out a mortgage of £230,000.
That makes your LTV:
230,000 / 250,000 = 0.92
x 100 = 92%
The higher your deposit, the lower your LTV. Lenders like low LTVs, because they see them as less risky for them. Bigger deposits also tend to mean you get smaller interest rates on your repayments, so you pay less for your property overall.
Most lenders will ask for a minimum deposit of 5% (or 95% LTV) if you’re a first time buyer. Many ask for more: a 10% deposit, or 90% LTV.
Will lenders do a credit check?
Mortgage in principle – no credit check
When you apply to lender or broker for a mortgage in principle, there’s no credit check. They’ll ask for your income, savings, and deposit amount, then automatically calculate an estimate of the loan you could get.
Agreement in principle – credit check
When you (or your broker) apply to a lender for an agreement in principle, they’ll check your credit score to see how you’ve managed debt before – and decide how risky it would be for them to lend you money.
If they see you’ve been managing your money well, they’ll be more likely to offer you a mortgage in principle. But if they see lots of missed bills and unpaid debts in your record, that might put them off giving you a mortgage loan.
Credit scores: a quick refresher
A credit report is a record of how you’ve managed your money. It shows things like your debts, whether you’ve paid bills on time, your store cards, where you’ve applied for loans, when you paid those loans back… you get the picture.
It comes with a credit score: that’s all the information in your report, summarised in one number.
Before you apply for an agreement in principle, check your credit report yourself first. You can do this with Experian, Equifax and TransUnion (previously CallCredit) – the agencies who work out your credit score in the UK. They each calculate it a little differently, so it’s worth getting a report from all three.
Once you get it, work through this credit score checklist to make sure your score is as good as it can be before you apply to lenders.
Do credit searches affect my credit rating?
There are two types of credit searches:
- Soft search: a cursory check that won’t affect your credit score
- Hard search: a deeper dive into your credit history, that shows up on your report and might lower your score
For agreements in principle, it’s worth checking if your lender will use a hard or soft search in advance. If they use a hard search, it’ll show up on your record as a full mortgage application. One or two of these won’t affect your score too badly, but several over a short amount of time can really drag it down – as it’ll look like you’ve been rejected many times in a row. Not great.
When it comes to a full mortgage application, lenders need to dig deeper into your finances – that’s almost always a hard search, but one you can’t really avoid.
You can check your own score as often as you like. It won’t affect your credit rating.
How long does a mortgage in principle last?
Mortgage in principle: no time limit
This gives you a rough budget, and doesn’t necessarily have a timestamp. It’s based on the income and deposit amount you entered when you calculate your MIP, so if those change your MIP won’t be helpful to you any more.
Agreement in principle: 30–90 days
Your agreement in principle will last around 30–90 days, depending on the lender. If your circumstances change during that period (eg you miss a credit card payment) that will change the validity of your AIP.
If your certificate runs out before you need it, don’t worry. You, or your broker, can always re-apply.
You might see tempting deals at AIP stage, but that doesn’t mean they’ll still be active when you upgrade to a full-blown mortgage. Your broker should make sure you’re on the right deal at the time you start a full application, which means you might end up with a different lender than the one who gave you your AIP – and that’s totally OK.
What happens after a mortgage in principle?
If you’ve got a mortgage in principle, your next step can either be an agreement in principle or a full mortgage application. Usually, you’ll do an AIP once you’ve found a property.
If you’ve already got your AIP, and your offer on the property has been accepted (hooray!), then you’re ready for the next step: converting your mortgage in principle to a full application.
Now you’ll need to submit more documents to your lender for inspection. Your lender will get a valuation (also known as a property survey) to confirm your property’s value from their perspective. It might be a good idea to consider getting your own independent survey alongside that.
Before you start a full application, your broker will usually check the market for you one more time, and might recommend you go with a different lender than the one who gave you your AIP. Don’t worry if that happens, it’s nothing out of the ordinary, and just means you’ll get a mortgage that’s better for you.
It usually takes around 2–3 weeks for a mortgage application to be examined and, hopefully, approved. Your solicitor will then arrange dates to exchange contracts (the moment you’re legally obligated to buy, and the seller obligated to sell) and complete (ie move in).
After that, the only thing left to do will be to pick up your keys, walk through the door, and try to remember where you packed the kettle.