Does an Agreement in Principle Involve a Credit Check?

An Agreement in Principle, often referred to as a Decision in Principle (DIP) or Mortgage in Principle (MIP), represents a preliminary assessment from a lender. It indicates how much they might be willing to lend to a prospective borrower. This document serves as an early step in the financing process, particularly common in real estate transactions. Its primary purpose is to provide an individual with an approximate borrowing capacity before a full loan application.

Understanding an Agreement in Principle

An Agreement in Principle (AIP) is a provisional offer based on initial financial information provided by the applicant. It is not a binding loan offer or a guarantee of funding, but an indication of potential eligibility. This document proves useful for applicants, particularly in competitive markets, as it demonstrates to real estate agents or sellers that the individual is a serious and financially capable buyer. For lenders, an AIP provides a quick, initial evaluation of a prospective borrower’s financial standing. An AIP is typically valid for 30 to 90 days and may be renewed if circumstances remain consistent.

The Role of Credit Checks

When obtaining an Agreement in Principle, lenders typically conduct a soft credit check, also known as a soft inquiry or soft pull. This type of credit check allows lenders to review an individual’s credit history without impacting their credit score. Soft checks are generally not visible to other lenders and are commonly used for pre-approvals, identity verification, or when an individual checks their own credit score. This approach benefits applicants by providing an early indication of borrowing capacity without the risk of a temporary dip in their credit score.

In contrast, a hard credit check, or hard inquiry, involves a more thorough review of an individual’s credit report and can cause a slight, temporary decrease in their credit score. Hard inquiries are visible to other lenders and are typically performed when a formal application for new credit, such as a mortgage or a new credit card, is submitted. While a single hard inquiry might only cause a minor score reduction, multiple hard inquiries in a short period could signal higher risk to lenders. However, for certain types of loans like mortgages, multiple inquiries within a specific timeframe (e.g., 14 to 45 days) are often treated as a single inquiry by credit scoring models to allow for rate shopping.

Information Required for an Agreement in Principle

To secure an Agreement in Principle, applicants must provide lenders with specific financial and personal details. This includes personal identification information, such as their full name, date of birth, and current and previous addresses for the past two to three years. Lenders also require income and employment information, including salary, employer’s name, and length of employment.

Information regarding existing financial commitments, such as outstanding loans, credit card debts, and other regular expenditures, is also necessary for the lender to assess affordability. Applicants need to provide a general idea of the desired loan amount and the approximate value of the asset being purchased. This comprehensive data enables the lender to make an informed preliminary assessment of lending potential.

Moving from Agreement to Full Application

An Agreement in Principle serves as a provisional step, with the next stage being the submission of a full loan application. This comprehensive application requires more extensive documentation and verification of the information initially provided. During this phase, lenders conduct a hard credit check to evaluate the applicant’s creditworthiness and financial history.

This detailed review involves submitting documents such as recent payslips, bank statements, and other financial records to confirm income, assets, and liabilities. Lenders undertake a more thorough underwriting process based on this verified information, which includes a detailed assessment of affordability and the property’s value. While an AIP streamlines the initial process by offering an estimated borrowing amount, it does not guarantee final loan approval.