Agreement in Principle

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Agreement in Principle (Part 1)

Carolyn Dunion explains how an Agreement in Principle works. Episode one of two, recorded in November 2024.

What is an Agreement in Principle?

An Agreement in Principle is also known as a Decision in Principle, a Mortgage Promise or a Mortgage in Principle. It’s basically a lender looking provisionally at an applicant and saying than in principle, it would lend to them and how much it would lend.

It’s as far as you can go without having an offer already accepted on a property.

Do you need an Agreement in Principle in Scotland?

It’s no different in Scotland than for the rest of the UK. Technically, you don’t have to get an Agreement in Principle before you make an offer, but it’s extremely advisable to do so.

What should I do if my estate agent is asking to see my Agreement in Principle? How do I get one?

Some estate agents will only allow you to view a property if they’ve seen your Agreement in Principle. This became quite popular during the pandemic when so many people were looking to view properties.

The estate agent is trying to make sure that only people ready to put in a meaningful offer are getting to view the property. Some estate agents just have that policy, in which case you will need one to view a property they’re advertising. Your mortgage advisor will be able to provide that for you.

Do I have to have an Agreement in Principle through the estate agent I’m looking to purchase through?

No, you absolutely don’t have to have it through that estate agent. Many estate agents have in-house mortgage advisors and will be keen for you to use them, but you don’t have to.

You might have to provide an Agreement in Principle in order to view a property. Whilst they can’t force you, they can refuse a viewing request if you don’t provide it.

How reliable is an Agreement in Principle and how long does an Agreement in Principle last?

The Agreement in Principle is as reliable as the information you provide. At that point we provide the lender with your name, date of birth, address history, your income and any credit commitments.

But if you have told your advisor, for example, that you have a salary of £45,000 and it turns out that you don’t, that Agreement wouldn’t be reliable. We tend to find the credit score is reasonably reliable, but it really does depend on the information that you provide.

In terms of how long it lasts, with many lenders it lasts for three to six months. However, if you get a Decision in Principle today and go out and declare yourself bankrupt tomorrow, even though your Decision in Principle lasts for three months, you still wouldn’t be able to get a mortgage.

Can I make an offer with an Agreement in Principle?

Yes, and in fact, it’s as much of a guarantee of a mortgage that you can get until you have an offer accepted on a property. A mortgage offer is issued based on two factors – you as an applicant, your income affordability and creditworthiness, and then also on the property being suitable.

Lenders will assess the specific property. Some properties, for example, will not form suitable security for the lender, especially if they are non-standard construction. So that Decision in Principle is as far as you can go down the road towards a mortgage without having an offer accepted on a property.

Does an Agreement in Principle mean you’ll get a mortgage?

It’s never a guarantee. It’s as far as you can go in the early stages. It’s so important to get it, because any inconsistencies on your credit report are flagged up early on.

An advisor can give you valuable information about how your affordability will be calculated, and once you’ve had your offer accepted on a property, we will then move to the full mortgage application.

That’s when lenders start assessing documents – your ID and income, and they’ll also be looking at the property. It is possible that something will come up and cause a problem at that stage, but it’s relatively rare.

If you’ve got your Decision in Principle via an advisor like myself, you’re far less likely for it to fall down at application stage – although nothing is guaranteed.

Will I need a credit check? Does an Agreement in Principle or a Decision in Principle affect credit score?

There will be a credit check as part of that Decision in Principle application. Most lenders will do what’s known as a soft footprint, not a full ‘hard’ search. It won’t affect your credit score.

If you’re somebody who follows one of the online credit report agencies, you’ll know they give you a figure. It might be out of a thousand – perhaps you have a score of 900.

Once a Decision in Principle is applied for, you might see that score reduced temporarily. That’s nothing to worry about and won’t impact your ability to get a mortgage.

But we avoid doing too many Decisions in Principle all at once – because that can impact your credit score. Again, if you’re using an advisor, they will know how far to go and which lenders to apply to. We minimise the applications you need to be successful.

How do I apply for an Agreement in Principle and how long does this take?

At McKendry Dunion Financial, we help our clients navigate the process because certain lenders might not be suitable for some clients, while others will. Each lender assesses different types of income in their own way.

So your first port of call is to contact us. We’ll take your information, and if we’re in a very big rush because you’ve got a closing date to aim for, we can usually get it turned around within half an hour.

We try to allow a little bit longer, just for availability of advisors. If there is something complex about the applicant, it might take a little bit longer than that – we may have to go around different lenders before we get approved. But it can be done extremely quickly.

Any final thoughts before we return with part two?

We see a lot of people who have gone online and believe that they have got a Decision in Principle. Then when they come to us, we realise it’s not actually a Decision in Principle, it’s an enhanced affordability calculator.

So it’s important to talk to somebody who knows what they’re doing. It works both ways – I’ve seen clients who’ve done it themselves, and it looks like they can borrow more than they actually can. Similarly, other people think they can’t get the affordability they need, but we can help them to find the right lender for their circumstances. That expertise and guidance is invaluable in getting you the right outcome.

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

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Agreement in Principle (Part 2)

Continuing the conversation on an Agreement in Principle with Carolyn Dunion.

When should I get an Agreement in Principle?

I would recommend getting an Agreement in Principle as soon as you are definitely going to start looking for a property. It’s a good idea to do that before you start, but don’t get it too soon. If I’ve got clients saying that they want to move next year, I would encourage them to get the Decision in Principle at the start of the year rather than now.

But if you’re actively trying to look at property, it’s useful. It’s a way to check there’s no issues on your credit report that you weren’t aware of, and you get meaningful guidance around what you can afford. You’re then ready to look within a set budget bracket.

Lenders’ affordability assessments and criteria can change, so it’s useful to get that information when you’re starting the process.

What information do I need to get an Agreement in Principle?

Some of it is very straightforward. We need your full name, including middle names. If you’re known by your middle name, we need to know your first name too, to be very accurate. We need your date of birth and nationality, and details of any visas if you have them.

We need a three-year address history and details of your income and how it’s earned. If you get a straightforward salary that’s the same every month, that’s simple. If you get a lot of bonuses or commission, we might need to see your last two P60s. For self-employed people, we need information about your personal tax return.

We also need to know about any credit commitments you have, which throws people off sometimes. We need to know about loans, car finance, credit cards, student loans and anything else that you are committed to paying, even if it’s interest only.

We will also ask you about anybody who’s financially dependent on you, be that a child or an adult.

How is affordability calculated for an Agreement in Principle?

Every lender has their own approach to assessing income. If you earn a straightforward salary that never changes, then it’s likely that will be quite simple. But if you’ve got variable income, or you receive some benefit income, make sure you’ve disclosed everything to your advisor for that affordability calculation.

If you’re looking to borrow the maximum amount possible, we will look at the makeup of your income and find the lender that will give you the most borrowing in those circumstances. If reaching your maximum borrowing is not a priority, we don’t need to choose a lender with the most generous affordability criteria.

Is an Agreement in Principle guaranteed? Can my mortgage be declined after an Agreement in Principle?

Sadly, yes, your mortgage can be declined. An Agreement in Principle is only an indication that the lender is prepared to lend to you. There’s still a full assessment of your documents and of the property.

Various things can come up as part of the full application that isn’t part of the Agreement in Principle, which means you’re unable to secure the mortgage. Having an advisor helping you doesn’t completely remove the risk of the application being declined, but it can certainly avoid some of the common pitfalls.

Can I get an Agreement in Principle if I’m a First Time Buyer?

Absolutely. That’s a nice straightforward question.

How will bad credit affect an Agreement in Principle?

If you’ve had any form of bad credit, the most important thing is to tell your advisor everything. Some people think that if they don’t mention it, it won’t come up. But it’s really beneficial for us to know what we’re dealing with.

People have different interpretations of what’s bad credit, and some things are really not a big deal. We will assess the issue and work out if it’s going to cause a problem. Sometimes it won’t.

If it is problematic, we can look at a range of specialist lenders that consider people who have had issues with their credit file. There are quite specific criteria to that, so the more information we have, the better chance we have of getting an Agreement with the right lender.

Is it harder to get an Agreement in Principle if I’m self-employed?

I wouldn’t say it’s harder, but the assessment of income is quite specific for self-employed people. People on PAYE through an employer get pay slips every month. With self-employed people, you’ll complete a personal tax return annually. Whatever’s on that annual tax return will be what the lender will accept as your income.

A document that used to be known as an SA302, now called a tax calculation, is a bit like a P60 for a self-employed person. It details the income you’ve had from any source. That might be profit from self-employment, dividends or some element of salary. It could include investment income, income from land and property, that kind of thing. It is all added up to work out the tax due.

Normally, as a self-employed person, you’ll be relatively unaware of that document being produced. But lenders usually work on the last two of those documents and average them, or they’ll take the lowest figure if that’s the most recent year.

So it’s not harder, but we do have to work from the figures that the lender wants. Sometimes it’s not a fair representation of what a self-employed person actually has as income.

I’ve been declined an Agreement in Principle. What can I do?

You definitely should speak to an advisor if you haven’t already. It’s not at all uncommon for people to be declined when going directly to a lender, but we can find a mortgage that works for them.

If there’s a specific reason why you’ve been declined, perhaps a very recent issue with credit, for example, it might be that we can’t get you approved at this moment in time. In that case, we always have a plan for what you need to do and when you are likely to be accepted in the future.

Sometimes we just check in with people for a couple of months until they get their credit profile sorted out. Or, if you can’t get the borrowing you need or want, the plan might be to wait until your next pay rise. Talking to an advisor is really very beneficial if you’ve had a decline.

What are the benefits of getting an Agreement in Principle with a mortgage advisor?

There’s a huge benefit in having confidence that your Decision in Principle is accurate, in terms of how a lender will view your application.

We also find that we become almost a mentor and a useful sounding board to clients as they go through the mortgage process. There’s an awful lot to learn and take into consideration when you’re looking to buy a property or remortgage. An advisor can be a really good source of information – and a person to run things by.

People often hear things from friends or colleagues about mortgages and property, and we can give a more accurate take on what you’ve been told. We might reassure you that it’s absolutely correct, or explain why it’s not. Having that person in your corner can be a huge help.