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What Is a Mortgage In Principle

What is a ‘Mortgage in Principle’?

 When you are in the early stages of applying for a mortgage, you may come across a number of terms that you are not familiar with or that you do not fully understand. The term ‘Mortgage in Principle’, sometimes referred to as a Decision in Principle (DIP), is a statement from a mortgage lender showing that they agree to lend a certain amount, based on the information provided to them.

 

Should I get a mortgage in principle?

 In Scotland, you are required to obtain a mortgage in principle before you submit an offer for a property. In other parts of the UK, you may be required by the property seller (or their estate agent) to provide evidence of your mortgage in principle. This gives the seller a good indication that you will be able to secure a mortgage loan that will allow you to buy the property. It also gives the buyer a firmer idea of what amount they will be able to lend, therefore which price range they can afford.

 

Having a mortgage in principle can save sellers the inconvenience of dealing with what are perceived to be time wasters, who actually will not be able to obtain a mortgage to allow them to buy the property. If there are a number of potential buyers, any with a mortgage in principle that covers the property price (or accepted offer) will usually be favoured.

     

    Drawbacks of getting a mortgage in principle

     Whilst a mortgage in principle will give you a good indication of whether you can get a mortgage offer and the amount you can lend, it is not a concrete offer. When assessing your suitability to lend the amount agreed in principle, the lender will conduct thorough analysis of your credit history and earnings before making their decision. If there are any issues that they think could impact your ability to afford and repay the mortgage, they may not offer you a mortgage, or will not lend as much as the amount agreed in principle.

     

    You should also be wary of any changes that happen between your initial mortgage in principle and when the time comes to actually apply for your mortgage. If it has been a significant amount of time between the two, interest rates could have changed or other circumstances may have changed that mean this particular mortgage lender’s deal is no longer the most suitable for you. It is worthwhile checking the mortgage rates and deals again before you consider applying for a mortgage with the lender you obtained the mortgage in principle with.

     

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    Can a mortgage in principle impact my credit rating?

     When you apply for a mortgage in principle, lenders will usually perform some credit checks. Depending on the lender, they may use what is called ‘soft searches’ which should not impact your credit report. However, if the lender performs ‘hard searches’ having a number of these can affect your credit report. If you are concerned about how a mortgage in principle may affect your credit report, it is a good idea to ask the lender which types of searches they will use.

     

    It is also recommended that you check your credit score using one of the online credit check platforms such as Experian or Equifax. If you do not regularly check your credit rating then this is definitely recommended, as there may be some historical or even recent credit issues that could impact your ability to get a mortgage.

     

    Having a mortgage in principle is generally always a good idea but if you are concerned about how it will impact your credit rating, you might be best to talk to a broker to look at your situation first and advise you on the best approach to take.

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