Does a Mortgage in Principle Affect Your Credit Score?

A Mortgage in Principle (MIP), often known as an Agreement in Principle (AIP) or Decision in Principle (DIP), serves as an initial assessment from a mortgage lender regarding how much they might be willing to lend a prospective homebuyer. This document helps individuals understand their potential borrowing capacity before fully committing to a property search. Many prospective homebuyers are concerned about an MIP’s potential effect on their credit score. This article clarifies how an MIP interacts with your credit history.

Understanding Mortgage in Principle and Credit Checks

A Mortgage in Principle is a statement from a lender indicating the approximate amount they would lend you. It is based on a preliminary review of your financial standing and provides a realistic budget for your property search. While not a binding offer, an MIP shows real estate agents and sellers that you are a serious and credible buyer.

Lenders typically conduct two types of credit checks: soft inquiries and hard inquiries. A soft inquiry occurs when your credit report is checked for informational purposes, such as pre-approvals or when you check your own credit. These checks do not affect your credit score. A hard inquiry happens when you formally apply for new credit, like a loan or a credit card. These checks provide a detailed look at your credit history and can temporarily impact your credit score.

For a Mortgage in Principle, lenders most often perform a soft credit check. This approach allows them to assess your creditworthiness and affordability without negatively affecting your credit score. The soft check provides enough information for the initial assessment.

The Impact on Your Credit Score

When a lender conducts a soft credit check for a Mortgage in Principle, it does not negatively impact your credit score. A soft inquiry is considered a review of your credit, not an application for new credit. It provides an estimate of your borrowing potential without leaving a visible mark on your credit report. You can obtain multiple MIPs from different lenders, and these soft checks will not accumulate to harm your score.

However, while less common for an initial MIP, some lenders might perform a hard inquiry. A hard inquiry can cause a slight, temporary dip in your credit score, typically by a few points. This impact is minimal and fades over a few months, remaining on your report for up to two years. If a lender plans a hard check for an MIP, it is advisable to confirm this beforehand.

The distinction between an MIP and a full mortgage application is important for your credit score. A full mortgage application, which occurs after you have found a property and are ready to finalize the loan, always involves a hard credit check. While multiple hard inquiries for a mortgage within a short timeframe are often grouped as a single inquiry by credit scoring models, a full application impacts your credit report.

Preparing for a Mortgage in Principle Application

Gathering the necessary information beforehand can streamline the Mortgage in Principle application process. Lenders require specific personal and financial details to assess your eligibility and determine a potential lending amount. This preparation helps ensure the accuracy of the initial assessment.

You will need to provide personal details such as your full name, date of birth, and address history for the past three years. Information regarding your income, including your salary, any bonuses, or commissions, is also necessary. Lenders will also ask about your monthly outgoings and existing credit agreements, such as credit cards and other loans. This helps the lender understand your financial commitments and capacity to repay a mortgage.

Next Steps After Your Mortgage in Principle

Once you have obtained a Mortgage in Principle, you can begin your home search. The MIP provides a clear indication of your budget, allowing you to focus on properties within your affordability range. It also serves as proof to real estate agents and sellers that you are a serious and financially capable buyer, strengthening your offer on a property.

The Mortgage in Principle is usually valid for a period ranging from 30 to 90 days. If your MIP expires before you find a property or submit a full application, you can renew it. After finding a home and having your offer accepted, you will proceed to a full mortgage application. This stage involves a detailed assessment, including a hard credit check and a property valuation, leading to a formal mortgage offer.