Decision in Principle
Decision in principles provide borrowers, sellers and lenders alike with key information regarding whether mortgage finance is possible. You will find that almost every mortgage lender will offer a decision in principle and will encourage you to do so.
What is a Decision in Principle?
A decision in principle (otherwise known as a mortgage in principle, agreement in principle or DIP) is a very early stage of the mortgage application process and determines not only whether a lender is prepared to lend the money but also the amount they can lend.
Decision in principles are much better than using income multiples as they take more information into account and therefore give a far more accurate figure of how much you can borrow. For first time buyers, this is especially useful as it will give you an idea of what value properties you need to be looking for.
Lenders encourage borrowers to get a decision in principle as not only does it inform the borrower of their budget and therefore their realistic house price range, but it also enables the lender to check whether the borrower is credit worthy and therefore worth pursuing for the business.
The lender collects personal and financial information about each applicant such as name, address, date of birth, salary, additional income, credit history and affordability assessment (a list of major outgoings against income) and will then perform a series of credit checks. Using all this information, the lender is then able to calculate whether they are able to provide finance and if so, how much they would be prepared to lend. This process is known as 'underwriting' and is based on many factors. If an applicant has a history of bad credit such as county court judgements [CCJs] or has previously filed for bankruptcy, the lender may not offer to lend as much or may even decline the loan.
Most lenders have three outcomes for a decision in principle; accept, decline and refer.
An 'accept' means that the lender is happy with the information provided and is prepared to lend a particular sum that disclosed as part of the 'accept' decision. The lender will be able to print a certificate showing the amount you can borrow which can then be used to prove that you have the finance potentially in place.
A 'decline' means that the lender is unable to lend any amount of money and therefore cannot provide a mortgage of any sort.
A 'refer' decision means that the lender needs to look at application more closely. Most lenders use a computer system to generate the decision and amount you can borrow but if there are circumstances that fall outside of the normal range, an underwriter will need to assess the decision personally. A decision is usually made within 24 hours of the application.
Note that decision in principles are by no means guaranteed and are conditional on other criteria being met such as the property being of an acceptable standard and value and the lender being able to validate the information provided (e.g. proof of income, bank statements, personal identification documents, etc).
A mortgage in principle may also help speed up the application process as the lender can begin processing the potential application at this point as opposed to waiting for a formal application to be made. A mortgage in principle is also a useful document when bidding on properties as estate agents tend to take the bid more seriously when they know the finance has been pre-arranged as it shows you are serious buyers.
Advantages of a Decision in Principle
- A decision in principle with let you know exactly how much you can borrow
- Estate agents will generally take your offer more seriously if they know the financial side has been sorted out
Disadvantages of a Decision in Principle
- Decision in principles involve a credit check and can have a detrimental effect on your credit rating if too many are performed
- You will need to disclose the personal information of every applicant before a decision in principle can be provided
- A decision in principle is not guaranteed and is dependant of other criteria being met
- A decision in principle is where a lender agrees to lend you the mortgage and confirms how much they can lend
- Don't do too many as they involve credit checks. Choose the most likely lenders and get decisions from them to give you an idea of how much you can borrow. You can then use income multiples for the remaining lenders. This will help to protect your credit rating. If you decide to go with a lender where you haven't already had a decision in principle and you can always do this when you submit a full application
For more information about 'Decision In Principles', you can call us on 020 8783 1337 or submit an online quote.