How to Get an Agreement in Principle

An Agreement in Principle (AIP), also commonly referred to as a Mortgage in Principle, Decision in Principle, or pre-approval, represents a preliminary assessment by a lender of how much they might be willing to lend to an individual for a property purchase. It serves as an initial step in the home-buying journey, providing an estimated borrowing amount based on a review of your financial information. This document helps prospective homebuyers understand their potential budget before committing to a full mortgage application.

The Role of an Agreement in Principle

Securing an Agreement in Principle is important for individuals navigating the home-buying process. This document provides an estimate of your borrowing capacity, allowing you to focus your property search on homes within an affordable price range. This helps prevent time wasted on properties that exceed your budget.

An AIP demonstrates to real estate agents and sellers that you are a serious and financially capable buyer. In competitive real estate markets, presenting an AIP can give your offer an advantage over those from buyers without pre-arranged financing. While an AIP is not a binding mortgage offer, it indicates potential eligibility, streamlining the subsequent stages of the home purchase process.

Gathering Your Information and Documents

Before applying for an Agreement in Principle, prospective borrowers must gather specific personal and financial documentation. Lenders require this information to assess your creditworthiness and determine a potential lending amount. This includes personal identification, such as a government-issued ID like a driver’s license or passport, along with your Social Security card.

Detailed income verification is also necessary, typically requiring pay stubs from the most recent 30 to 60 days and W-2 forms for the past two years if you are a salaried employee. Self-employed individuals will need to provide personal and business tax returns for the last two years, along with profit and loss statements. Proof of other income sources, such as bonuses, alimony, disability benefits, or pension payments, should also be prepared.

Lenders will also review your expenditure and debts to understand your financial obligations. This requires recent statements for all loan accounts, including car loans, student loans, and credit cards. Documentation of regular outgoings contributes to a comprehensive financial picture. Additionally, bank statements for checking, savings, and investment accounts are needed to verify assets and proof of funds for a down payment or closing costs. A soft credit check is typically performed during the AIP process, so understanding your credit history is beneficial.

Submitting Your Application

Once all necessary information and documents are gathered, you are ready to submit your Agreement in Principle application. The application process involves providing your personal and financial details to a prospective lender. You can apply online, in person, or through a mortgage broker.

During submission, you will input your financial data, such as income, assets, and existing debts, into the lender’s application form. The lender will perform a soft credit check at this stage, which allows them to review your credit history without negatively impacting your credit score. This review helps the lender determine a potential loan amount and interest rate. You will then receive the formal Agreement in Principle.

Receiving and Using Your Agreement

Upon successful application, you will receive your Agreement in Principle, often presented as a letter or an email from the lender. This document outlines the estimated loan amount you are eligible for, including potential interest rates and loan terms. An AIP is not a final, binding mortgage offer; rather, it is a conditional commitment based on your current financial standing.

An AIP remains valid for a set period. If this period expires before you find a property, you may need to renew it, which often involves updating your financial information and a new credit check. With your AIP, you can confidently begin your property search, using the estimated amount to guide your budget. Presenting the AIP to real estate agents and sellers demonstrates your financial readiness and commitment, which can strengthen your offer on a property. Once an offer is accepted, the AIP transitions into the formal mortgage application process, where the lender conducts more detailed checks, including property appraisal and a hard credit inquiry.