This detailed explanation of mortgage pre-approval (or Agreement in Principle/Decision in Principle in the UK) provides an excellent guide for prospective homebuyers. It highlights the crucial differences between various stages of initial mortgage assessment and outlines the steps involved.
Here’s a summary of the provided information, emphasizing the UK context:
Understanding How Much Home You Can Afford: Mortgage Pre-Approval (Agreement in Principle/Decision in Principle)
Understanding how much home you can afford is crucial to the home-buying process. Getting a mortgage pre-approval (known as an Agreement in Principle (AIP) or Decision in Principle (DIP) in the UK) can help estimate how much home you can buy and help you budget for any costs related to the home purchase.1 It can also give sellers more confidence that you’re serious about buying their house.
What Is A Mortgage Pre-Approval (AIP/DIP)?
A mortgage pre-approval (AIP/DIP) is documentation from a lender stating the amount you can conditionally afford for a home.2 To get an AIP/DIP, you will likely have to submit certain types of financial information and have the lender perform a credit check.3 A mortgage pre-approval letter (AIP/DIP letter) is also often used to show sellers and estate agents that you have the potential funds to buy a home.4 While a mortgage pre-approval (AIP/DIP) is a strong indication that you can secure financial assistance, it’s not a guarantee from the lender you’ll receive a mortgage. The final mortgage offer is subject to a full application, property valuation, and complete underwriting.
Mortgage Pre-Approval (AIP/DIP) Vs. Prequalification Vs. Verified Approval
The terms “mortgage pre-approval” and “prequalification” sometimes are used interchangeably, but they’re not the same.5 Some lenders may also offer a “Verified Approval” which is a more robust form of pre-approval.6
| Feature | Mortgage Prequalification | Mortgage Pre-approval (AIP/DIP) | Verified Approval (e.g., from Rocket Mortgage®) |
| Purpose | To show that you have an initial indication from a lender that you will most likely qualify for a loan based on self-reported data. It’s an estimate and more informational. | A mortgage pre-approval shows that your financial profile will most likely qualify you for a loan. It’s more formal as it looks deeper into your financial documentation and credit history. | A document showing that your assets, income, and credit have been verified by the lender. It is more formal than a standard mortgage pre-approval. |
| Documents Considered | Proof of income, existing loan statements, bank statements (often self-declared) | Pay slips, existing loan documentation, tax returns (P60s, SA302s for self-employed), bank statements, credit history | Same as Mortgage Pre-approval, but with full verification of all submitted documents. |
| Credit Inquiry | None (typically a soft credit inquiry or no check at all) | Typically a soft credit inquiry in the UK for an AIP/DIP, sometimes a hard credit inquiry depending on the lender’s policy. | Hard credit inquiry |
| Benefits | May be a faster process. Helpful to give you a ballpark idea of how much house you can afford. | Shows you are a more serious buyer. Can show a more accurate representation of what you can afford. | Shows you are a highly serious buyer with verified financials. Can offer more certainty and a stronger negotiating position. |
How To Get Pre-Approved For A Mortgage (AIP/DIP)
There are several steps you’ll need to take when getting an AIP/DIP for a home loan, including determining whether you meet minimum requirements, collecting relevant documentation, and choosing a lender.
1. Meet The Financial Requirements For Home Loan Pre-approval
Though it ultimately depends on the lender, here are some typical requirements for mortgage pre-approval (AIP/DIP) depending on the type of home loan you choose. Make sure that you can meet these requirements — checking your credit score before speaking to a lender will help see what your chances may be.
| Loan Type | Typical Credit Score (UK equivalent) | Maximum Debt-to-Income Ratio (DTI) (UK Affordability Assessment) | Down Payment (Deposit) | Other Requirements |
| Standard/Conventional Mortgage | Generally 600+ (though lenders assess overall profile, not just a single score) | Varies by lender, often around 4-4.5x income, but subject to stress testing affordability | Typically 5% – 20% (or more for better rates) | Criteria varies by lender; stable income, low existing debt. |
| Shared Ownership | Similar to conventional | Similar to conventional, but also considers rental payments on the unowned share | Typically 5% of the share you’re buying | Specific to shared ownership schemes and eligibility criteria. |
| Help to Buy (Equity Loan) | Similar to conventional | Similar to conventional | Minimum 5% | Must be a new-build property, strict property price caps, only for first-time buyers or existing homeowners moving. |
| Buy-to-Let Mortgage | Higher expectations due to investment nature | Assessed on rental income potential covering a multiple of mortgage payments | Typically 25% or more | No DTI, but strict stress tests on rental income and personal income for background. |
Note: In the UK, lenders conduct affordability assessments rather than strictly adhering to a DTI percentage.7 This includes looking at all income and outgoings to ensure the mortgage is sustainable, even with potential interest rate increases.
2. Choose A Mortgage Lender (or Broker)
A mortgage lender or mortgage broker that’s the right fit can save you significant money in interest and fees.8 It can also help make it a much smoother process when it comes to finalizing your mortgage. Many lenders typically offer AIP/DIP processes online, although there are some that offer ones over the phone or in person.9
When comparing lenders, look for features such as interest rates, fees, and types of home loans offered. You don’t want to go with a lender, for instance, that doesn’t offer the loan type you want or need. Considering lower interest rates could save you thousands of pounds over the life of a loan, it’s worth taking the time to shop around, often facilitated by a whole-of-market mortgage broker.
3. Collect Paperwork
Lenders will need to collect paperwork from you in order to start the mortgage pre-approval (AIP/DIP) process. Some of the documents necessary for mortgage pre-approval include:
- Government-issued ID (Passport, Driving Licence)10
- Proof of Address (Utility bill, Council Tax bill dated within the last 3 months)
- National Insurance number
- Pay slips from employer (typically last 3 months)
- Bank statements (typically last 3-6 months for all accounts, including savings)
- Statements from investment or retirement accounts
- Tax returns from the previous 2 – 3 years (SA302s and Tax Year Overviews for self-employed)
- W-2 or 1099 forms (P60s and business accounts for self-employed)
- Statements from existing loans (e.g., credit cards, personal loans, car finance, student loans)11
- Proof of deposit source (e.g., savings statements, gifted deposit letter)
4. Apply For Pre-approval (AIP/DIP)
Choose the lender you want to work with (or work with a mortgage broker) and follow their directions on what to do to submit an application for a mortgage pre-approval (AIP/DIP). Make sure that you provide accurate contact information about you and your co-borrower (if applicable) and the documentation mentioned in the previous step.
5. Receive A Mortgage Pre-approval Letter (AIP/DIP Letter)
The lender will look over your financial details and make a decision. If approved, you’ll receive an AIP/DIP letter. The letter will state a specific amount the lender is conditionally willing to lend you and when the offer will expire. You may be able to request adjustments to your AIP/DIP letter, depending on the price of homes you’re making offers on.
6. Don’t Make Large Purchases Until Closing
Though it’s not technically part of the mortgage pre-approval application process, this step is vital. To help increase your chances of getting a final approval for a mortgage, hold off on making any large purchases or taking out another loan. Your mortgage pre-approval (AIP/DIP) is based on your current financial situation, and drastically changing it could affect how much you can get in funding, if any at all.12 If you do plan on making a big purchase, speak with your lender as you’re submitting documentation to see if that can affect their decision.
Mortgage Pre-approval FAQs
- How long does mortgage pre-approval (AIP/DIP) last?
How long an AIP/DIP lasts will depend on the lender, though it typically spans from 30 – 90 days in the UK.13 On average, you can expect a mortgage pre-approval letter to last around 90 days. To see how long your AIP/DIP could last, speak with your lender.
- Is it worth it to get a pre-approval (AIP/DIP) for a home loan?
It can be very much worth it to get an AIP/DIP for a home loan because you tend to have a better understanding of how much you can afford to pay for a home. Plus, it can also help you narrow down your choices when it comes to looking at homes that fall within your budget. Even if it’s not a seller’s market, having a mortgage pre-approval (AIP/DIP) is helpful because it shows estate agents and home sellers that you’re in a good place financially and are serious about buying a home.14
- How long does it take to get a mortgage pre-approval (AIP/DIP)?
How long it takes to get an AIP/DIP will depend on the lender. In most cases, the process can take as little as a few minutes online for an instant decision, to a few days, assuming the lender receives all your information in a timely fashion. However, if the lender needs more documentation from you, then the process could take longer.
- How far out should I get pre-approved for a mortgage?
Getting an AIP/DIP can happen at any time during your home buying process. Keep in mind that the mortgage pre-approval letter does expire, so you’ll want to have enough time to shop around for a house before that expiration date.15 You don’t want to risk having the AIP/DIP expiring and having to go through the process again. It’s generally recommended to get it when you’re seriously starting your property search.
- Do mortgage pre-approvals (AIP/DIPs) affect credit?
In the UK, mortgage pre-approvals (AIP/DIPs) typically involve a soft credit check, which does not affect your credit score.16 However, a full mortgage application will involve a hard credit check, which can temporarily lower your credit score by a few points.17 It’s always best to confirm with your lender or broker what type of credit check they will perform for the AIP/DIP.
- What happens if I don’t get pre-approved for a home loan?
When you get denied for a home loan or an AIP/DIP, most lenders will provide a reason why you weren’t approved. You have the right to contact the lender to get a justification for their decision. For example, maybe your debt-to-income (DTI) ratio (or affordability assessment) was too high, or you’re self-employed and can’t come up with 2 years’ worth of profit and loss statements. Whatever the reason may be, take these into consideration and take the time to improve them before applying again. If your DTI is high, steps you could take include paying down debt or finding ways to increase your income.18 Or, you may have to wait until you have several years of tax returns if you’re a self-employed individual.
- Is mortgage pre-approval (AIP/DIP) required?
Getting a mortgage pre-approval (AIP/DIP) isn’t legally required. However, it can give you a more competitive edge among other buyers. It can also help you decide on a housing budget and narrow down your search, saving you time.19 Mortgage pre-approval letters (AIP/DIPs) can be really useful if there are multiple bids on a home — sellers want to know their buyers can back up their offers with funding.
The Bottom Line
An AIP/DIP letter shows how much home you can conditionally afford and can show home sellers you’ve got the financial means to make a purchase offer.20 While it can take anywhere from a few minutes to a few days to go through the process, doing so can be well worth it.
Before choosing a lender and applying for a mortgage pre-approval (AIP/DIP), look at your credit profile, income, and any other financial information that could give you clues as to whether you can get approved for a loan. Equally important is to confirm whether you have the means to pay for upfront costs out of pocket, such as the down payment on a home and any closing fees (legal fees, stamp duty, etc.) charged by your lender.