How to Get a Mortgage Agreement in Principle

A Mortgage Agreement in Principle (AIP), or pre-approval, is a lender’s initial assessment of how much they might lend you for a home. It provisionally confirms your borrowing capacity based on provided financial information. Obtaining an AIP helps you understand your potential budget early, allowing you to focus your home search on affordable properties.

The AIP indicates your financial standing to real estate agents and sellers, signaling you are a serious and qualified buyer. This can be advantageous in competitive housing markets. While not a guaranteed loan offer, it streamlines the initial stages of home searching.

Gathering Your Information

Before applying for a Mortgage Agreement in Principle, gather personal and financial documents to ensure a smoother application and accurate assessment. You will need your full legal name, date of birth, current address, and any previous addresses for the last three to five years. Accurate contact details, including phone numbers and email addresses, are also necessary.

Employment and income details are crucial.

Employed Individuals

Provide your employer’s name, address, job title, and start date. Proof of salary (gross and net figures) typically requires recent pay stubs (30-60 days) and W-2 forms from the past two years. Document additional earnings like bonuses or commissions for the last two years.

Self-Employed Individuals

More extensive income verification is needed. This includes federal tax returns (IRS Form 1040 with Schedule C or K-1) for the past two to three years. Lenders may also request profit and loss statements or certified financial statements from your business.

Other Income Sources

Rental income, pension benefits, or disability payments require supporting documentation like lease agreements or benefit statements.

Review your expenditures and existing financial commitments. Compile a list of all regular monthly outgoings, including payments for existing loans (car, student, personal), credit card balances, minimum monthly payments, and any outstanding overdrafts. Lenders also consider recurring household expenses like utility bills, property taxes, and insurance premiums.

Information regarding your savings and available funds for a down payment is essential. Provide details of accounts holding these funds, often through recent bank statements (60-90 days). If any portion of your down payment comes from a gift, a gift letter from the donor may be required, stating the funds are not a loan and detailing the source. Having your main checking and savings account details accessible is beneficial for the application.

Lenders perform a ‘soft’ credit check as part of the AIP process to evaluate your creditworthiness. This preliminary check provides an overview of your credit history and does not negatively impact your credit score. Ensure the financial information you provide aligns with what lenders find on your credit report for a seamless assessment.

Applying for Your Agreement in Principle

After gathering your information, submit your Mortgage Agreement in Principle application.

Direct Application

You can apply directly with financial institutions like banks, credit unions, or specialized mortgage lenders. Options include online portals, phone applications, or in-person appointments.

Mortgage Brokers

Many applicants work with a mortgage broker. Brokers can submit your information to multiple lenders, simplifying comparisons and offering access to a wider range of products.

The application process involves providing your prepared information. Online applications require navigating digital forms to input details about income, employment history, assets, and existing debts. In-person or phone applications follow a similar question-and-answer format, with a loan officer guiding you. This structured input ensures the lender receives all necessary data for their preliminary assessment.

During the application, the lender performs a ‘soft’ credit check. This allows them to review your credit report without affecting your credit score. This inquiry provides essential insights into your financial behavior and payment history, helping them gauge your credit risk. Unlike a ‘hard’ credit inquiry, which occurs during a full mortgage application, a soft check is not visible to other lenders and does not impact your credit standing.

Upon submitting your application, Agreement in Principle decisions are often provided quickly. Online applications can receive a provisional decision almost immediately, sometimes within minutes. Applications submitted over the phone or in person may take slightly longer, typically a few hours to one business day, due to manual review. This swift turnaround allows you to proceed with your home search with a clear understanding of your potential borrowing power.

Understanding Your Agreement in Principle

After successfully applying, you will receive an Agreement in Principle document. This outlines the lender’s preliminary assessment of your borrowing capacity, specifying the maximum amount they are provisionally willing to lend. It may also include an indicative interest rate, though this rate is not fixed and can change by the time you secure a full mortgage offer. The AIP document states its validity period, commonly 30 to 90 days, after which it may need renewal or reassessment.

An Agreement in Principle is a conditional indication of what you might borrow, not a binding mortgage offer. It is a preliminary assessment based on your provided information and a soft credit check. This demonstrates to real estate agents and sellers that you are a serious and financially capable buyer. Presenting an AIP can give you an advantage in negotiations, signaling your readiness to proceed with a purchase. However, it does not guarantee you will ultimately receive the loan or that final terms will match the initial indication.

The final mortgage offer remains subject to a comprehensive review. This includes a full mortgage application, which involves a ‘hard’ credit check that can temporarily impact your credit score. Lenders will also conduct a detailed verification of all your financial documents, including bank statements, employment history, and income.

A property valuation will be required to ensure the home’s value supports the loan amount. If your financial circumstances change after receiving an AIP, such as a job change, a significant increase in debt, or a large purchase, inform your lender. Such changes could affect your eligibility or the terms of a future mortgage offer, potentially requiring a re-evaluation of your AIP.