Shared Ownership Mortgages: Agreement in Principle

What is an Agreement in Principle – also known as a Decision in Principle?

An Agreement in Principle is confirmation from a mortgage lender that they will offer you the mortgage loan required, subject to the valuation of the property and proof of your income. It is not, however, binding on the lender and neither are you under any obligation to make a full application.

Why would I need and Agreement in Principle?

You can show a vendor or housing association that you are very likely to be able to obtain the necessary mortgage and are therefore a serious purchaser. Some housing associations will require that you obtain an Agreement in Principle before offering you a property.

It is also the first part of the application process and the mortgage lender will stipulate what documentation they would require when you submit a full application

How do I obtain an Agreement in Principle?

You can either apply directly with a lender or through a mortgage broker. You will need to provide both personal and financial information, which will need to include details of any credit cards, including the outstanding balance and any other loans or hire purchase agreements. You will also need to provide details of the property that you are hoping to purchase – if it is a Shared Ownership property this will include the rent and service charge.

How does the mortgage lender decide on an Agreement in Principle application?

The lender will check that the property meets their lending criteria, and that the requested mortgage meets their affordability requirements. The mortgage lender will then carry out a credit check with one or more credit agencies. Finally they will pass the information through their own credit scoring process; if you score highly enough, you will be offered an Agreement in Principle, if not, it will be declined.

How does the lender’s own credit scoring work?

Mortgage lenders keep this as confidential information and regard it rather as the ‘crown jewels’.  But it could conceivably take into account such information as your post code, family make up, length of employment, and previous credit agreements completed successfully.

What will happen if I pass?

You will be given a letter or certificate, either by the lender or the mortgage broker. You will also have a reference number and a list of documents that the mortgage lender will require if you make a full application.

What will happen if my application is declined?

You will generally be given some reason for the decline i.e. undeclared credit, low credit score etc. If you have failed due to adverse credit then you will need to obtain a copy of your credit report. If you have not at this point used the services of a mortgage broker, then it would be sensible to approach one. Some lenders are more relaxed on their own credit scoring and you may well pass with another lender.