What is decision in principle?

Decision in principle, also known as mortgage in principle or agreement in principle, is a document that confirms the bank’s willingness to lend you a certain amount of money on agreed terms. We will go step by step through all the most relevant information related to decision in principle / mortgage in principle.

Decision in principle - what is it and what does it look like?

As we have already mentioned, a mortgage in principle / decision in principle is a formal declaration of the bank’s willingness to grant you a mortgage of a certain value and with an interest rate in line with the offer you have chosen. However, let us point out that receiving a DiP is not the same as granting you a mortgage and if something unforeseen happens between the issuing of this document and the submission of your final application, there is not much you can do. Typically, a Decision in Principle will expire if the borrower circumstances or the economy have significantly changed

On the other hand, a decision in principle does not commit you to a final credit agreement - if your mortgage broker finds you a more favourable offer or you cancel the property purchase for some reason, nothing bad will happen.

As the author of the mortgageminds blog notes, mortgages in principle can be likened to a first job interview ending with a decision to qualify a candidate for further stages of the recruitment process. In other words, it is more about rejecting applicants who do not meet the basic credit criteria.

How long does it take to issue a decision in principle and how long is it valid?

The time it takes to issue an initial mortgage decision (decision in principle) varies widely and depends on both the internal policy of your chosen bank and the current interest in mortgages. In practice, it is possible to issue a mortgage in principle within an hour, although this process can also take several days.

As far as the validity of the agreement in principle is concerned, the standard timeframe is between 30 and 90 days and again, lenders have a lot of leeway in this regard. Remember, however, that it will not take you long to get the decision in principle again, so you do not have to worry too much about the validity of this document.

How to obtain a decision in principle?

If you have found yourself on the Extend Finance website, you have most likely decided to work with a mortgage broker. This means that the whole process of applying for an initial declaration from the bank will be much smoother and simpler.

To obtain a decision in principle, you will be asked to provide us with:

• Income information: for employed people this will be payslips / P60 and for self-employed people it will be SA302 / Tax Overview;

• Account statements to document your expenses;

• Any loan / credit agreements;

• Information regarding your current and past place of residence, e.g. council tax, bills.

Let’s point out, however, that these documents will later be used for the actual mortgage application, so the sooner you gather all the necessary information, the sooner you can pick up the keys to your new home!

Can you get a negative decision in principle?

Of course, from time to time such situations occur. Fortunately, they are usually due to formal errors and not to a lack of credibility in the eyes of the banks. Decision in principle will be negative if:

• Your income is very low or very unstable - if your current earnings are barely enough to cover your basic living costs, the affordabilitycalculated on their basis will probably be so low that the bank will not decide to lend you money. Your situation is no better if the income you earn fluctuates dynamically;

• You are constantly changing jobs - we have already mentioned on our blog that changing jobs can improve your image in the eyes of the bank. This is true, however, if your employment history is too rich, or worse, there are gaps in it, the bank may not want to lend you money;

• Your credit score is low - it can take years to build up a good credit history, but it can take as little as 3-4 months to ruin it. Persistent non-payment of electricity, gas or rent instalments will make lenders wary of lending to you so that they don’t have to collect debts later;

• There were errors in the application - it is not uncommon for an application for a Decision in Principle to be rejected due to errors made by the fillers. Often these are minor things such as a misspelled document number, a mistaken income amount or a typo;

• You have declared bankruptcy, your house has been repossessed or there has been an order of prohibition against you which has not been complied with - if any of these events occurred less than six years ago, the chance of obtaining a mortgage is almost nil. Having your property repossessed for debt or declared bankrupt is a situation that would put off anyone, even the most liberal lender.

Does decision in principle affect credit score?

Well, it depends. According to Halifax, the issuing of a decision in principle is preceded by a soft credit check, which does not affect your credit rating. However, other sources suggest that some banks are vetting applicants in a way that already lowers that rating.

Precisely for this reason, it is not worth requesting several or a dozen agreements in principle - it is safer to obtain one, possibly two, documents of this type.

Why apply for a decision in principle?

Firstly, the issuing of this document is completely free of charge, so regardless of the decision you receive, you will get nothing. The only cost to you is your time.

Secondly, the waiting time for a decision in principle is not excessively long - in many cases, it will be just a few hours. In the case of Extend Finance, you can apply for an agreement in principle at the very first meeting with your broker, which saves you time and makes it easier for you to make a decision regarding the purchase of a property.

Thirdly, by getting a mortgage in principle you know how much you are able to borrow, which makes the final choice of property very easy. Knowing your real creditworthiness saves you time by bypassing homes that don’t fit into your budget.

Finally, fourthly - you speed up the mortgage procedure by collecting all the necessary documents at the very beginning of your cooperation with the broker. Practice shows that although it can take our clients 3 working days to prepare all the certificates and statements, many people hesitate and postpone the decision to buy a house, delaying even for several weeks or months. By taking this big step towards buying a house, you will sooner free yourself from renting, which unnecessarily deprives you of money and takes away your financial freedom.

Summary

If you’re planning to buy a property in the UK, it’s worth taking the first step towards this now and contacting a licensed mortgage broker. We are a long-established company that has already helped hundreds of British people to buy their own home. Your first consultation is always free with us and within an hour you will be able to determine if you are ready to move. Don’t wait, contact us today!