This comprehensive overview of mortgage pre-approval is highly relevant to the UK context, although some terminology might differ slightly. In the UK, what is often referred to as “mortgage pre-approval” is commonly known as an Agreement in Principle (AIP), Decision in Principle (DIP), or Mortgage in Principle (MIP). The core concepts and benefits remain the same.
Here’s a summary of the provided information, tailored with UK terminology and additional context where helpful:
What is Mortgage Pre-Approval (Agreement in Principle/Decision in Principle)?
Mortgage pre-approval, or an Agreement in Principle (AIP) / Decision in Principle (DIP) in the UK, is when a lender reviews your financial and credit profile to determine if you are likely to qualify for a home loan and how much you may be able to borrow.
In addition to informing your homebuying budget, an AIP can strengthen your purchase offers by assuring sellers that you will likely qualify for the funding needed to complete the purchase.
To get an AIP, you’ll need to submit an application, along with proof of identity, income, assets, and debts, to a lender so they can assess your financial profile.
Many first-time homebuyers are surprised to learn that getting an AIP is one of the first steps in the home-buying process. Before looking at property listings online, you should discuss your finances with a mortgage lender to get an AIP for a home loan.
The AIP process is not complicated, but many buyers have questions about it simply because it may be a new experience, especially if you’ve not bought a house before.
This article will explain the mortgage pre-approval (AIP/DIP) process, including:
- What an AIP is and how it works
- Why an AIP is so important when buying a home
- The difference between prequalification and preapproval (AIP/DIP)
- How to get an AIP
What Is Mortgage Pre-Approval (Agreement in Principle/Decision in Principle)?
Mortgage pre-approval (AIP/DIP) is the formal process of having a lender review a borrower’s credit profile and finances to conditionally approve them for a specific loan amount.
The main purpose of an AIP is to confirm that you qualify for a home loan and to strengthen your position when you’re ready to make an offer. Plus, since the AIP tells you how much you can borrow, you can start shopping in the right price range from the beginning. This can save you from falling in love with a home, only to find out that you don’t qualify for a large enough loan to actually buy it.
An AIP also assures your real estate agent and home sellers that you can qualify for the loan needed to close the deal.
Many real estate agents in the UK often insist that you get an AIP before they agree to represent you. This is because agents usually don’t earn their fee until the purchase is complete. They do not want to invest their time in showing you homes unless they can confirm that you are financially able to buy the homes.
Being pre-approved can also increase your chances of getting an offer on a home accepted by the seller. Sellers may be hesitant to accept offers from unapproved buyers because once the property goes under contract (or “under offer” in the UK), many buyers assume it is no longer available, and the traffic will slow. Then, if the deal falls through because the buyer couldn’t secure funding, the seller may have to start looking for a new buyer all over again. Even worse for the seller, some buyers may assume the deal fell through because of a problem with the house, making it even more difficult for them to find a buyer. This is why sellers strongly prefer to work with pre-approved buyers.
How Does Mortgage Pre-Approval (AIP/DIP) Work?
The mortgage pre-approval (AIP/DIP) process begins when you, as the homebuyer, submit an application to a lender along with documentation of your current income, assets, and debts. The application also authorizes the lender to access your credit history, which shows how you manage debt (whether you borrow responsibly, pay your bills on time, etc.). This typically involves a “hard pull” of your credit report, which can cause a slight temporary decline in your credit score, but won’t significantly impact your score in the long run, especially if done within a short period for mortgage applications.
The lender reviews the application, assessing the following factors to determine if you qualify for a mortgage loan:
- Your credit score: The numerical score of how responsibly you manage credit.
- Your income and employment history: How long you’ve been in your current position, and how much money you make.
- Your debt-to-income ratio (DTI): The amount of your monthly debt repayment obligations, as a percentage of your gross income.
- Your assets and savings: Cash and other investments that can be accessed to cover the down payment and closing costs (often referred to as “completion costs” or “legal fees” in the UK).
- The type of loan you’re applying for: Different mortgage loan types have different financial requirements.
If the lender determines that you meet the preapproval qualification requirements, they will issue an AIP letter, stating that you are pre-approved and listing the maximum loan amount you are qualified to receive.
What Is the Difference Between Prequalification and Pre-Approval (AIP/DIP)?
While pre-approval (AIP/DIP) involves a formal review of your financial documentation and credit report, prequalification is an informal review of your self-reported financial position to determine whether you might qualify for a home loan if your information can all be verified later.
Prequalification can be completed quickly, but it does not carry as much weight as pre-approval (AIP/DIP). Real estate agents and home sellers are far less likely to accept a prequalification as proof that you can secure a home loan.
If you are serious about buying a home, getting pre-approved (an AIP/DIP) is well worth the effort.
What Is Preliminary Pre-Approval (Soft Credit Check AIP)?
Preliminary pre-approval is a convenient stepping stone some lenders offer to full pre-approval. Preliminary pre-approval is a streamlined version of the process that provides a faster answer to your application by requiring a less detailed review of your financial documentation.
With preliminary pre-approval, you can submit your financial information and authorize a soft pull of your credit report to give the lender an overview of your score. Unlike the hard pull of a traditional pre-approval (also called an inquiry), a soft pull does not impact your credit score.
This is a valuable solution for homebuyers who need pre-approval quickly so they can start working with an agent or make an offer on a home right away.
How To Get Pre-Approved for a Mortgage (AIP/DIP) in 3 Steps
To get pre-approved for a mortgage (an AIP/DIP), follow this simple three-step plan:
Step 1: Prepare Your Financial Documents
Lenders typically need the following documents to issue an AIP:
- Proof of income: Pay slips for the last 30 days. If you are self-employed, you can submit your most recent profit and loss statements.
- Proof of income history: P60s (equivalent to W-2s) from the last two years, along with documentation of any other income sources. Self-employed applicants may also need to show SA302s and tax returns from the last two years.
- Proof of assets: The two most recent statements from all bank and investment accounts.
- Debt information: A list of active debts, including credit cards, student loans, car loans, and any other outstanding debts (some of this information may be accessible to the lender through the credit report).
- Proof of identity: Your National Insurance number and a valid, government-issued ID (such as a passport or driver’s license), plus proof of address (e.g., utility bill, council tax bill).
- Documentation of the source of your down payment: If your down payment is coming from your documented assets, no additional information may be needed. However, if you’ll be using gifted funds for your down payment, you may need a statement from the giver confirming the gift amount.
- Documentation of any name change: If you recently changed your name and your old name is listed on any of your documents, you may need to provide documentation of the reason for the name change, such as a marriage certificate, divorce decree, or court order.
Step 2: Choose Your Lender Carefully
Look for a reputable, transparent lender or mortgage broker with a strong track record in the mortgage industry. You can explore online reviews to see what other borrowers have experienced with different lenders. One sign of a credible, experienced lender is that they offer educational resources to help you make informed decisions. You can also review mortgage interest rates to ensure your lender offers competitive rates.
In the UK, using a mortgage broker is highly recommended as they can compare deals across many lenders (“whole of market”) and often identify issues early that could affect your application.
Step 3: Submit Your Pre-Approval Application
Many lenders offer convenient online application portals where you can submit your application and upload your supporting documentation through their website. If you are uncomfortable applying online for any reason, you might visit a branch to complete the application in person or call a mortgage loan officer (MLO) (often referred to as a mortgage advisor or consultant in the UK) to apply over the phone.
The Benefits of Mortgage Pre-Approval (AIP/DIP)
Mortgage pre-approval (AIP/DIP) offers multiple benefits for homebuyers, including:
- Confirming qualification. An AIP offers some assurance that you will likely qualify for a home loan if your financial situation remains stable.
- Learning your borrowing limit. Knowing how much you can borrow allows you to budget for your home purchase more confidently.
- Strengthening your offer. Your AIP assures home sellers that you can qualify for the funding needed to complete the purchase, which may incentivize them to accept your offer, especially in competitive markets.
- Accelerating the homebuying process. Your lender has your AIP and supporting documentation on file, giving you a head start when you get a home under contract and are ready to apply for your new mortgage.
Additional Important Considerations of Pre-Approval (AIP/DIP)
Before applying for pre-approval (AIP/DIP), it is important to consider a few additional items.
- The Impact of Pre-Approval on Your Credit Score:
The pre-approval process typically requires a hard pull of your credit, which can temporarily lower your credit score by several points. However, in the UK, multiple mortgage-related hard inquiries within a short period (often 30-90 days, though this can vary by lender and credit reference agency) are usually grouped together, meaning they will only count as one inquiry for scoring purposes. So you will not significantly hurt your credit by having multiple mortgage-related credit inquiries during this window.
- Limitations of the Pre-Approval Letter (AIP/DIP):
AIP letters come with a few limitations:
- They’re not loan guarantees. An AIP means you’re likely to qualify, but final approval depends on a full underwriting process, including a review of the property you’re buying.
- They have an expiration date. Most AIP letters are valid for 30 to 90 days in the UK. After that, you’ll need to update your financials and possibly get another credit check (which might be a soft or hard pull depending on the lender’s refresh policy).
- If your financial situation changes, the letter could be revoked. If your income, debt, employment, or credit score changes, you may need to apply for a new AIP based on your new financial profile.
- They don’t factor in the property. Final loan approval includes an assessment of the property you’re buying to make sure it meets loan program requirements (like appraised value – known as valuation in the UK, condition, and title). Since the AIP is typically issued before the home is chosen, this cannot be accounted for in the AIP.
- The Process Relies on Accuracy and Communication:
For a smooth pre-approval process, applicants must present all relevant documentation to the lender. Lenders may have additional questions or require additional documentation to complete the process, so applicants must also be accessible and responsive to follow-up communication from the lender.
Start the Mortgage Pre-Approval (AIP/DIP) Process Today
Pre-approval (AIP/DIP) is a crucial first step on your path to homeownership. Getting pre-approved can help you confidently shop in the right price range and make a stronger offer when you find the right home. If you’re planning to buy a home in the near future, get pre-approved for your new mortgage today.