Does a Mortgage in Principle Affect Credit Score?

A mortgage in principle serves as an initial assessment from a lender, indicating how much they might be willing to lend a prospective homebuyer. It provides a preliminary understanding of borrowing capacity, helping buyers narrow down their housing options. This initial step offers clarity before committing to a full mortgage application.

Understanding a Mortgage in Principle

A mortgage in principle, also known as an Agreement in Principle (AIP) or Decision in Principle (DIP), is a written statement from a lender. This document estimates the amount a lender could potentially offer for a mortgage, based on a preliminary review of an applicant’s financial situation. It acts as a helpful guide for homebuyers, providing a realistic budget for their property search.

Securing a mortgage in principle demonstrates seriousness to real estate agents and sellers, potentially giving borrowers an advantage in competitive housing markets. For lenders, it allows for an initial, non-binding evaluation of a borrower’s eligibility without requiring a full application. A mortgage in principle is not a guaranteed offer and does not obligate either the borrower or the lender to proceed with a full mortgage.

Credit Checks and Your Score

The impact of a mortgage in principle on a credit score is a frequent concern for prospective homebuyers. Lenders typically conduct one of two types of credit inquiries: a soft search or a hard search. The type of check performed for a mortgage in principle determines its effect on an individual’s credit report.

A soft search, or soft inquiry, is a preliminary review of a credit file that does not affect a credit score. These checks are generally invisible to other lenders and do not leave a visible footprint on a credit report. Many lenders use a soft credit check when issuing a mortgage in principle, allowing individuals to assess borrowing options without negative repercussions.

In contrast, a hard search, or hard inquiry, is a comprehensive review of a credit file that occurs when a formal application for credit is made. This type of check leaves a visible “footprint” on a credit report and can cause a slight, temporary dip in a credit score. While a single hard inquiry is unlikely to have a significant long-term impact, multiple hard searches within a short timeframe could lower a score more noticeably. A full mortgage application involves a hard credit check, which is a more detailed assessment than the initial soft inquiry for a mortgage in principle.

Information Required for Application

To obtain a mortgage in principle, applicants typically provide various personal and financial details. This information allows lenders to conduct their preliminary assessment of affordability and eligibility.

Lenders generally request personal identification, such as name and date of birth, along with residential address history, often spanning the last three years. Details regarding employment, including income, employer information, and how regularly income is received, are also necessary. Applicants should outline their monthly outgoings, including existing debts, loans, and credit card balances, in addition to any savings they possess.

Next Steps After Obtaining an Agreement

Once a mortgage in principle has been secured, individuals can confidently begin their property search. The document provides a clear indication of the potential borrowing amount, helping to focus the search on properties within an affordable range. Real estate agents often prefer that potential buyers have a mortgage in principle, as it signals their readiness to make an offer.

The transition to a full mortgage application involves a more thorough assessment by the lender. This stage includes a hard credit check, providing a detailed analysis of the applicant’s credit history. Lenders will also require extensive documentation to verify all financial information previously provided, such as proof of income, bank statements, and details about the specific property being purchased. A property valuation will also be arranged to confirm the home’s worth.