When it comes to buying a home, there are many terms that you might come across that can seem confusing. Two such terms are “agreement in principle” and “mortgage in principle”. Although these terms sound similar, they refer to two very different things.
Agreement in Principle
An agreement in principle, also known as a Decision in Principle or Mortgage Promise, is a statement from a lender that they are willing to lend you a certain amount of money towards the purchase of a property, subject to certain conditions being met. This is not a legally binding agreement, but it does give you a good indication of how much you may be able to borrow.
The lender will ask for some basic information about your income, your expenses and your credit history in order to make their decision. They may also run a credit check on you at this stage.
An agreement in principle is useful for several reasons. Firstly, it gives you a good idea of how much you can afford to spend on a property. This can help you to narrow down your search and avoid wasting time viewing properties that are out of your price range.
Secondly, having an agreement in principle can make you a more attractive buyer in the eyes of sellers. It shows that you are serious about buying a property and have taken steps to get your finances in order.
Mortgage in Principle
A mortgage in principle, also known as an Agreement in Principle or Decision in Principle, is a written confirmation from a lender that they are willing to lend you a specific amount of money to buy a property, subject to certain conditions being met. This is a legally binding agreement and is sometimes also known as a “pre-approval”.
To get a mortgage in principle, you will need to provide more detailed information about your income, expenses and credit history than you would for an agreement in principle.
Once you have been given a mortgage in principle, you can start looking for properties that fit within your budget and make an offer on a property with confidence. Once your offer has been accepted, you can then apply for the full mortgage, using the mortgage in principle as evidence of your ability to borrow.
So, what’s the difference?
The main difference between an agreement in principle and a mortgage in principle is that the former is a statement of intent, while the latter is a formal agreement to lend you money.
An agreement in principle is useful for getting a rough idea of how much you can borrow, while a mortgage in principle is essential for making an offer on a property and applying for a mortgage.
In summary, if you’re just starting out on your home buying journey, an agreement in principle can be a useful tool to help you understand your borrowing potential. However, if you’re ready to start looking at properties and making offers, a mortgage in principle is essential.