Does an Agreement in Principle Affect Your Credit Score?

An Agreement in Principle (AIP), often recognized as a Decision in Principle (DIP) or a Mortgage in Principle, serves as an initial, conditional offer from a lender. It provides an estimate of how much a financial institution might lend for financing, such as a mortgage. This preliminary assessment helps individuals understand their potential borrowing capacity and affordability before a full application, useful when engaging with real estate agents or sellers.

What an Agreement in Principle Entails

Obtaining an Agreement in Principle involves providing a lender with key financial and personal information. Applicants typically submit details such as their name, date of birth, addresses for the past three years, income, monthly outgoings, existing credit agreements, savings, and debts. This information helps the lender assess affordability.

During this preliminary stage, lenders commonly perform a “soft credit check” or “soft inquiry” to review an applicant’s credit history. This inquiry provides sufficient information for an initial lending decision without impacting the applicant’s credit score. It allows individuals to explore borrowing options without affecting their credit standing.

Soft vs. Hard Credit Inquiries

Credit inquiries fall into two main types: soft and hard, each with distinct effects on a credit report. A soft inquiry occurs when a credit report is checked for informational purposes, not a credit application. Examples include checking your own credit score, pre-approvals for credit card offers, or employment background checks. These inquiries are not visible to other lenders and do not impact your credit score.

A hard inquiry occurs when a lender reviews a credit report for a formal credit application, such as a mortgage, car loan, or credit card. This inquiry leaves a visible “footprint” on the credit report for other lenders to see. Hard inquiries can cause a temporary, slight decrease in a credit score, usually by a few points, and remain on a credit report for up to two years, though their impact typically diminishes after 12 months.

Impact on Your Credit Score

An Agreement in Principle, relying on a soft credit inquiry, generally does not negatively affect your credit score. Soft inquiries provide a preliminary view of creditworthiness without indicating a new credit application, thus avoiding adverse impact. This allows individuals to obtain an estimate of their borrowing capacity without negatively impacting their credit profile.

While most lenders use a soft inquiry for an AIP, some might conduct a hard inquiry, which could leave a mark on the credit report and potentially affect the score. Applicants should confirm with their prospective lender whether a soft or hard inquiry will be performed. However, the standard practice for an Agreement in Principle is a soft check.

Transitioning from Agreement in Principle to Full Application

After receiving an Agreement in Principle, the next step is often to proceed with a full loan application, especially after finding a suitable property. This involves a comprehensive “hard credit inquiry” by the lender. This hard inquiry is a standard part of the thorough assessment for a final lending decision. The lender will review detailed financial documentation, including income verification, bank statements, and a complete credit history, to confirm affordability and eligibility.

The hard inquiry for a full application differs from the initial soft inquiry for an AIP, as it appears on the credit report. This can cause a temporary, minor dip in the credit score, typically by a few points, though the impact is usually short-lived. The Agreement in Principle provides an estimate without credit score repercussions, while the full application involves a deeper credit assessment that may momentarily influence the score.