If you are looking for a house, you may have heard the term mortgage in principle being used.
But what exactly is it, and how long does it last?
Read on to find out.
What is a mortgage in principle?
A mortgage in principle (MIP) (also known as an agreement in principle (AIP)) is a document that confirms how much a lender is willing to lend you based on your financial situation.
It is not a guaranteed offer or a formal acceptance of your mortgage application.
However, it is an essential step towards getting your mortgage. And it gives you a clearer idea of how much you can borrow and the mortgage interest rate.
This is useful when you begin looking for a property.
How do lenders decide MIPs?
The lender will perform a soft credit check and find out more about your situation to assess your eligibility for a mortgage.
This will not usually affect your credit rating. You must be prepared to provide some information to help the lender make an informed decision, such as your:
- Income
- Employment status (self-employed, employment history, etc.)
- Expenses
- Debt.
And more.
Typical length of a MIP
A MIP usually lasts for around 90 days. However, this can vary depending on the lender and the market conditions (which affect mortgage rates).
Knowing how long your MIP will last helps you understand how much time you have to find a suitable property.
Changes that can affect a MIP
It’s also worth being prepared for potential changes that may affect the MIP.
Employment status
For example, suppose you get a new job, and your financial situation changes when the MIP is valid.
In that case, it may no longer be accurate based on your new circumstances.
Therefore, you may also want to avoid making significant life changes before making an offer on a property.
What if you can’t find a property within MIP time limit?
Suppose you cannot find a property to purchase within 90 days. In that case, you can apply for another MIP.
However, your lender will perform another soft credit check, and you will need to go through the same application process as you did previously.
If you are still looking for a property as you are approaching the end of the initial 90-day period, the best thing to do is speak to your lender and discuss your options.
Can you renew an MIP?
Most lenders will allow you to renew an MIP.
However, to do this, you must undergo the application process again.
This means having another soft credit check performed by the lender and providing up-to-date information about your financial situation, which may have changed since the last application.
Renewing an MIP can be helpful if you have not found a property within the initial time limit.
However, it’s worth avoiding renewing too often, as the lender will perform a soft credit check each time you apply.
While one soft check will not usually impact your credit score, having too many applications within a short period may negatively affect it.
Why is an MIP used?
A MIP is a valuable document as it gives you a clear idea of how much your lender will let you borrow and the interest rate you will likely pay when you get a mortgage.
When looking for your ideal property to purchase, you can use this information to find properties within your budget.
Moreover, a MIP can make it easier for you to negotiate with estate agents. It demonstrates that you are a serious buyer with a clear idea of your budget.
Along with this, having a MIP helps speed up the application process, as you will have already provided some of the information the lender needs to decide.
Once you have found a property you want to buy and have made a formal mortgage application, the lender will perform a full credit check and verify your income and expenses before making a final decision.
