Agreement in Principle: What It Is and Why It Matters

When buying a home, one of the most important steps in the process is obtaining an agreement in principle, also known as a mortgage in principle or decision in principle. So, what exactly is an agreement in principle and why is it so important?

An agreement in principle is a document issued by a mortgage lender stating that, based on preliminary information provided by the borrower, they would be willing to lend a certain amount of money to that borrower. It is not a guaranteed offer of a mortgage, but rather an indication that the lender is willing to consider the borrower’s application.

Why is an agreement in principle important? Firstly, it gives the borrower an idea of how much they can realistically afford to borrow and therefore how much they can offer on a property. This can save time and prevent disappointment by avoiding the situation where a borrower falls in love with a property they cannot actually afford.

Secondly, having an agreement in principle can give the borrower an advantage when it comes to making an offer on a property. It shows the seller that the borrower is serious and has already taken steps towards securing a mortgage. This can make the borrower’s offer more attractive to the seller, especially if there are multiple offers on the property.

Finally, obtaining an agreement in principle can speed up the mortgage application process once the borrower has found a property they want to purchase. It shows the lender that the borrower meets their initial lending criteria and can help to streamline the application process.

It is worth noting that an agreement in principle is not a formal mortgage offer and is subject to further checks and assessments by the lender. The lender may require additional information or documentation from the borrower before making a final decision on a mortgage offer.

In conclusion, obtaining an agreement in principle is a crucial step in the home buying process. It can save time, give the borrower an advantage in making an offer on a property, and speed up the mortgage application process. It is best to obtain an agreement in principle before actively searching for a property to ensure that the borrower is looking within their means and to give them confidence in making an offer when they do find the right property.