As you start the process of getting a full mortgage and making an offer on a property, a key question arises: do you need a mortgage in principle to make an offer without one being accepted? While it is possible to apply for a mortgage and make an offer on a house without first obtaining a mortgage in principle, also known as an agreement in principle, doing so can put you at a disadvantage compared to buyers who have already secured approval from their mortgage provider.
Going through the process to obtain a mortgage in principle shows sellers that you are serious and well-prepared, gives you insight into the amount you can borrow before making an offer in writing, and allows you to move faster if your higher offer is accepted since part of the mortgage application process is already complete. Without a principle agreement in place, your credit score may take a hit if multiple mortgage applications are required, and you risk losing out to competing buyers who have already confirmed their financing.
Overall, taking the time upfront to contact or mortgage broker and secure a mortgage in principle sets you up for a smoother process when getting a mortgage and making an offer on the property of your dreams. This introductory guide explores the ins and outs of making an offer with or without pre-approval and explains why obtaining a full mortgage application in principle first is so advantageous.
What is a Mortgage in Principle?
Also known as an agreement in principle or a decision in principle, a mortgage in principle is a statement from a lender saying they will lend you money as long as your circumstances don’t change. It is not a formal mortgage offer but confirms you are likely to be approved for a certain loan amount.
Why Get a Mortgage in Principle Before Making an Offer on a house?
Getting a mortgage in principle first is advisable for several reasons:
- It shows estate agents and sellers you can probably get financing to buy the property. This makes your offer more appealing than offers without confirmed financing.
- Knowing what you can borrow helps you look for homes in your price range. Without a principle agreement, you may miss out on affordable homes or waste time viewing unaffordable ones.
- With financing already lined up, you can move faster if your offer is accepted. This gives you an edge over competing buyers still arranging mortgages.
How to Get a Mortgage in Principle
- Mortgage in principles are usually free. Check if your lender charges a fee.
- You’ll need to provide basic personal and financial details like income, debts, deposit amount, etc. Supporting documents may be required.
- The process often only takes minutes. You’ll get a response within 24 hours if more information is needed.
- Soft credit checks that don’t affect your credit score are generally used. Ask if they’ll do a hard check that could temporarily impact your rating.
The Benefits of Getting Pre-Approved for a Mortgage
Getting pre-approved for a mortgage through a mortgage in principle goes beyond just making your offer more appealing. There are several other advantages:
- Know your budget. When you know how much you can borrow, you can set your home search budget accurately. This prevents disappointment from finding dream homes you can’t actually afford.
- Strengthen your negotiating position. With financing confirmed, you are in a better position to negotiate on price, closing date, or other terms. Sellers know you can close the deal.
- Act quickly on desired homes. In competitive markets, homes sell fast. Pre-approval lets you make quick offers and lock in homes you love.
- Streamline the mortgage process. Since some of the legwork is done, the formal mortgage application goes faster once your offer is accepted.
- Lock in interest rates. If rates are low when you get pre-approved, you may be able to lock in that rate even as rates rise later.
When to Get Pre-Approved
Timing is important when getting pre-approved:
- Get pre-approved as soon as you start house hunting. Don’t wait until you’ve found a home.
- Shop mortgage rates from multiple lenders to find the best deal.
- Monitor pre-approvals as they expire after 60-90 days typically. Renew if still house hunting.
- In competitive markets, consider getting pre-approved even before starting your search.
Alternatives to Pre-Approval
If getting pre-approved isn’t possible, some alternatives include:
- Making offers contingent on securing financing later. However, this makes your offer less attractive.
- Providing proof of financial assets to show you can pay cash if needed. But this ties up capital you may need for a down payment.
- Working with a reputable lender who can process mortgages quickly. But this still adds uncertainty versus being pre-approved upfront.
Conclusion: Agreement in principle
While not legally required, having a mortgage in principle first is highly recommended when making an offer. It shows you have financing ready and can act quickly, making your offer more appealing.