IF you’re busy house-hunting for your dream home, your estate agent may ask whether you have a “mortgage in principle.”
Here we take a closer look at what this is, and how long it lasts.
1
What is a mortgage in principle?
Also known as a “decision in principle,” this is a statement or letter written by a lender, setting out how much they would be willing to lend.
It gives you a helpful illustration of how much you could borrow, based on an initial assessment of your circumstances.
Things your lender will look at include your income, outgoings, and credit score.
However, it’s not the same as going through the rigours of a full mortgage application.
It can also give you an idea of how much interest you’ll pay.
How long does it last?
Typically, a mortgage in principle lasts for 60 to 90 days. This will depend on the lender.
Why do I need one?
Having a mortgage in principle puts you in a position to make an offer when you find the property you want to buy.
It demonstrates your strong purchasing credentials, and gives estate agents reassurance that you are in a position to proceed.
How do I get one?
You can ask for a mortgage in principle from your bank or lender.
If you use a broker to help scour the market and find a deal specific to your particular circumstances, they will also be able to provide you with the relevant paperwork.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan – The Government will lend you up to 20% of the home’s value – or 40% in London – after you’ve put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Mortgage guarantee scheme – The scheme opens to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it’s eligible for homes up to £600,000.
As many banks and brokers have online tools that allow you to calculate how much you can borrow, you may be able to get one by typing personal details, such as your age, income and expenses into their website.
Remember that this is only a rough estimate.
The Sun has spoken to plenty of first time buyers who have dished out tips on how they’ve got a mortgage in principle as part of our My First Home series.
Will it affect my credit score?
While some lenders may carry out a soft credit check when providing a mortgage in principle, this will not impact on your credit score.
As a mortgage in principle isn’t binding, generally speaking, no hard credit check is performed.
If in doubt, speak to your lender or broker to confirm this.
When might I need a mortgage in principle?
One of these statements can be useful for any potential buyer, ahead of making an offer.
It gives you credibility and shows you can afford to buy.
Equally, at a time when houses are in high demand, a mortgage in principle can be particularly helpful.
This was the case recently, for example, in the run-up to the end of the stamp duty holiday on June 30, when property prices rocketed, and homes got snapped up within days of being put onto the market.
A decision in principle demonstrates to the seller just how serious you are.
This can make you more attractive, and potentially put you ahead of the pack.
What happens when the mortgage in principle runs out?
Given that one of these agreements runs out after a certain period of time, you should only get one if you’re serious about buying soon.
If you leave a lengthy period between getting a mortgage in principle and making a formal mortgage application, you could find that interest rates have changed – or that you could find a more competitive deal elsewhere.
You also want to avoid getting several agreements in quick succession.
While there’s no issue if lenders or brokers only carry out a soft check, if several hard searches are made on your file within a short space of time, this may set the alarm bells ringing.
When lenders come to look at your credit history for your full mortgage application, if they think you’ve been turned down for credit a number of times, they may decide not to lend to you.
Moving to a full mortgage application
Once you’ve had your offer accepted by a seller, the next step is to move on to a full mortgage application.
This is where the lender starts looking at your income, expenses and personal information in more detail.
As part of a full application, lenders may question the make-up of your income more closely, and carry out a stress test on your finances.
At this stage, you will need to provide certain items of paperwork, including up to six months’ of bank statements, as well as proof of ID and income.
When you make a formal application, the lender has the right to change the details of the deal set out in the mortgage in principle.
Once you get your formal mortgage offer, this will usually expire within three to six months.
Five first-time buyer schemes if you miss out on initial First Home scheme properties with 30% off.
This first-time buyer saved £22k deposit for her home using the 50-30-20 method – here’s how you can too.
Having space to entertain guests is key for first-time buyers, research shows.
Woman freaked out after discovering 30ft underground cave in her house
