Understanding Agreement in Principle
An Agreement in Principle (AIP) is a helpful first step in a mortgage application. It’s pretty much the same thing, really, as a reservation document issued by a mortgage lender. This document advertises available mortgage terms based on a limited analysis of your financial situation.
Though it provides a good sense of borrowing capacity, it does not assure mortgage approval. Instead, it gives you a preview of what you can borrow, usually valid for 60 to 90 days. Getting an AIP is a relatively fast and straightforward process.
In reality, some lenders are able to deliver an approval decision within 10 minutes or less!
What is an Agreement in Principle?
An agreement in principle is a powerful tool. It shows financial credibility to home sellers, proving that you’re a serious investor who can quickly and easily follow through on a property purchase.
This document is incredibly useful to have when you’re making offers, as it shows your willingness to do so, but more importantly, your readiness. AIPs can simplify the home purchase process, providing you and your lender early indications of how much you may be able to borrow.
Note that an AIP isn’t a deep dive into your credit report. If your situation is altered or important information is missed on the AIP application, you may be at risk of denial.
This is particularly easy to do when you’re applying for a mortgage. It is wise to seek an AIP as early as you are prepared to purchase. Keep in mind, the terms they are offering you is not a done deal.
Can a Mortgage Be Declined After an AIP?
A mortgage application can still be denied after receiving an AIP. Additional scrutiny from lenders can reveal concerns that borrowers had not previously thought of.
This includes shifts in your income or the circumstances of your household, like death or divorce, or errors in the original application. Understanding why there was any drop is critical to preventing future mistakes.
If you are rejected, then you can either re-apply for an AIP with another lender or take time to re-evaluate your situation. For example, getting a raise would make you more likely to buy one.
Is Denial Common After an AIP?
While not frequent, it is denied. The answer depends on your unique situation and lender guidance, but your chances are incredible.
Remaining watchful and ready for a possible no-go, even with an AIP in hand, is essential.
Reasons for Mortgage Decline
When a mortgage application suddenly disappoints post-AIP it can feel like a kick in the teeth. Even after receiving initial approval, there are a number of reasons that can result in a final decline. Common reasons include:
- Final credit check issues
- Changes in personal circumstances
- Application errors
- Lender criteria changes
1. Credit History Issues
A bad credit history is usually a decisive factor in any mortgage decline. A thorough credit check by lenders would have picked up any former credit issues. Missed payments, defaults, and County Court Judgments (CCJs) from the last six years will negatively affect your application.
These adverse situations can lead to hurdles in the process. What’s more, multiple credit applications can fill your report with hard inquiries, which can make you look desperate or financially unstable.
Consistent credit report monitoring is key to catching errors early on so you can fix them before you apply. Being registered on the electoral roll can help strengthen your credit report, too.
2. Affordability Concerns
So lenders need to have a close look at your capacity to repay, looking at income and outgoings. Even a temporary increase to expenses or a reduction in income can foreshadow larger challenges with affordability.
This is where these sudden changes in financial circumstances trigger alarm bells. It’s always a good idea to do some deep affordability math first to make sure you’re financially prepared for the lifelong promise of a mortgage.
3. Income Changes or Low Income
Unpredictability in income is a confidence-killer for lenders. Income stability is a very important factor, particularly for self-employed or contract employees who need to show a track record of income.
Being sure to document all sources of income clearly will help you show a consistent and trustworthy financial picture throughout the application process.
4. Problematic Deposit Source
Lenders are very interested in making sure deposit sources are legit and easily traceable. Deposits that don’t make any sense or that are not consistent can raise red flags.
Track the sources of deposit funds clearly to make the mortgage process easier and avoid mysterious donations.
5. Administrative Mistakes
Common errors in your application can result in avoidable declinations. Go through every field carefully to ensure correct and full information.
Hiring a mortgage broker might be one way to help oversee this paperwork and increase your chances of avoiding mistakes that can delay or derail the process.
6. Changes in Personal Circumstances
Life changes like losing a job or going through a divorce can make a mortgage out of reach. Never hide any changes to your financial status from your lender.
Having stability in your personal situation is tantamount to the mortgage application process. Keep in mind that a single mortgage decline doesn’t signify denial all over.
Implications of a Declined Mortgage
Receiving a declined mortgage application can result in a significant combination of emotional and financial burden. The process is just very frustrating sometimes, it’s like you’re riding up a big hill and never cresting it. The reaction for most will be a mix of concern and sadness at first.
This reaction usually follows at least having had an Agreement in Principle (AIP) in place. It’s important to view this as an opportunity to regroup and refocus, not as a death sentence. Figuring out what caused the decline can provide useful lessons.
Maybe you’ve had a sudden change in your monthly outgoings, or maybe you were outside the lender’s ideal demographic. That kind of information gives you the power to make better decisions from here on out.
Impact on Future Credit Applications
Although a declined application after AIP doesn’t hurt your credit score directly, it can still affect future applications. That’s due to the fact that each credit application creates a footprint, and multiple applications in a short time frame can result in hard credit checks.
Lenders are wary of multiple hard inquiries as that can indicate a history of declined loans. A better strategy would be to stagger applications, allowing time for your credit profile to settle.
Monitor your free Experian Credit Score to know how lenders are likely to see you. Before you do, this step is key to knowing your financial situation. A high score can greatly improve your prospects for approval down the line.
Influence on Credit Scores
Don’t worry—your credit report won’t show any declined applications. Lenders can be spooked if they see multiple hard inquiries in a short duration. This is where keeping a clean credit profile becomes very important.
Paying down other debts and keeping your credit utilisation below 25% can improve your score. Increasing your deposit can mean you need to borrow less, which is always a good thing.
Further support options such as the Government’s Help to Buy schemes are beneficial. Remember, lenders care most about your credit history for the last six years. Often, by illustrating a track record of positive behaviour, you can get what you want.
Steps to Improve Approval Chances
When a mortgage application is rejected after an AIP, that can be a bitter disappointment. All is not lost—in fact, there are a number of things you can do to maximize your chances of approval the next time around.
Here’s a bullet list to guide you:
- Improve credit score
- Avoid immediate reapplication
- Consult a mortgage expert
Enhance Your Credit Score
Monitoring your credit score is a necessity. By monitoring your credit report regularly, you’ll be able to find out what you need to work on to improve your credit.
Search for any potential mistakes or unpaid bills that could be pulling your score down. Clearing outstanding debts and decreasing your credit utilisation can provide your credit score with an impressive increase.
It’s equally important to pay current on other loans and collections in a timely manner. Documenting your payment history with consistent, on-time payments will prove your financial responsibility and make you more appealing to potential lenders.
Avoid Immediate Reapplication
It can be hard not to feel the urge to dive back into mortgage applications immediately, but holding off could pay off.
As you might imagine, jumping straight into a new application without knowing why the last one was denied first will more than likely result in a second denial. Use the opportunity to learn why they made their decision.
Taking these points into consideration and working to improve your financial situation before reapplying can help your approval chances immensely.
Consult a Mortgage Expert
Getting help from a pro can make all the difference. A mortgage broker or advisor can provide you with personalized advice suited to your specific situation.
They can match you with more than 100 potential lenders. Whether you have been rejected in the past, they’ll work with you to identify the best mortgage for you!
Our broker partners work hard to get you the best deal possible. This would leave you in a better position to get a better deal with more flexible specialist lenders.
Then, they can investigate whether it is feasible to appeal the lender’s decision. They should weigh whether reopening the agreement to renegotiate would be a realistic option.
We offer this service entirely at no cost. Our excellent reviews on Trustpilot, Feefo, and Google are a testament to our commitment to our clients’ success.
Frequently Asked Questions
What is an Agreement in Principle?
An Agreement in Principle (AIP) is a basic mortgage offer. It indicates the estimated amount a lender would be able to lend you based on preliminary checks. It’s not even a commitment to lend money, let alone a guarantee of a mortgage.
Why was my mortgage declined after an Agreement in Principle?
Lenders may decline a full mortgage due to poor credit history, changes in financial circumstances, or discrepancies in provided information.
What should I do if my mortgage is declined?
Go over the lender’s comments to figure out what you need to revise. 3. Review your credit report for mistakes It’s best to speak with a mortgage adviser for personalised advice.
Can I reapply for a mortgage after being declined?
Luckily, you can reapply. Fix the causes of the decline, in the first place. Focus on improving your credit score and overall financial standing before reapplying.
How can I improve my chances of mortgage approval?
Make sure everything is factually correct. Work on improving your credit score and paying down debt. Save up to a larger deposit. For more help navigating the mortgage process, reach out to a local mortgage advisor.
Does a declined mortgage affect my credit score?
A declined mortgage shouldn’t hurt your credit score. It’s true that several consecutive credit checks hurt your score. Limit the number of applications.
Is it possible to get a mortgage after being declined?
Yes, as a matter of fact, it is. Tackle the cause of the decline, boost your financial profile, and shop all lenders. Finding a good mortgage advisor is key.