What is a decision in principle?

A decision in principle, also known as a mortgage in principle or an agreement in principle, is a lender’s indication of how much it may be willing to lend you, based on limited checks. It is not a mortgage offer or a guarantee. Below we go step by step through the most important information about decisions in principle.

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

A decision in principle is a lender’s conditional indication of how much it may be willing to lend you, based on limited checks. However, 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. A decision in principle is valid only for a set period, and if your circumstances change before you apply, the lender may not offer the same amount or may decline the application.

A decision in principle also does not commit you to taking out the mortgage: lenders such as Santander state that a decision in principle carries no obligation to take out a mortgage with them afterwards. So if your mortgage broker finds you a more favourable offer, or you cancel the property purchase for some reason, you are not tied in.

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 get a decision in principle varies and depends on both the lender’s internal processes and how many applications it is handling at the time. 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 validity is concerned, the standard timeframe is between 30 and 90 days, and lenders set their own periods. If it expires, you can usually apply again, but the lender will reassess your application and may run a new credit search.

How do you get a decision in principle?

At Extend Finance, we assess your circumstances and identify suitable lenders before submitting a Decision in Principle application on your behalf. This can make the process more straightforward and help you avoid applying to lenders whose criteria may not fit your circumstances.

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 year 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.

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 a decision in principle be declined?

Yes, a lender can decline a decision in principle. This may happen if:

• Your income is very low or very unstable - if your current earnings are barely enough to cover your basic living costs, the affordability calculated 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 varies a lot from month to month;

• You change jobs very often - we have mentioned on our blog that changing jobs can sometimes improve how a lender sees you. However, if you change jobs very often, or there are gaps in your employment history, the lender may not want to lend to you;

• Your credit score is low - it can take years to build up a good credit history, but missed payments are recorded on your credit file and can quickly harm 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 - mistakes in the application, such as an incorrect income figure, can also lead to a decline;

• You have been declared bankrupt, your home has been repossessed or you have an unpaid county court judgment (CCJ) - if any of these events happened in the last six years, they are likely to still show on your credit file and getting a mortgage will be much harder; a lender that does accept you may charge a higher interest rate.

Does a decision in principle affect your credit score?

Whether a decision in principle affects your credit score depends on the lender: many large UK lenders use only a soft search, which does not affect your credit score, while others may carry out a hard search. A hard search is recorded on your credit file and is visible to other lenders, and several in a short period can make lenders more cautious.

For this reason, it is better not to apply to many lenders in a short period, and to check whether each lender uses a soft or hard search before you apply.

Why apply for a decision in principle?

Firstly, lenders do not usually charge for a decision in principle.

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, a mortgage in principle gives you an indication of how much a lender may be willing to lend, which helps you focus on properties within your likely budget. This saves you time you might otherwise spend on homes that are outside it.

Finally, fourthly - you speed up the mortgage procedure by collecting all the necessary documents at the very beginning of working with your 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.

Summary

If you’re planning to buy a property in the UK, it’s worth taking the first step towards this now and contacting an FCA-authorised 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!