This text effectively breaks down the initial stages of mortgage financing, distinguishing between “prequalification” and “pre-approval” and advising on when to pursue each. In the UK, the terminology is slightly different but the concepts are largely the same.
Here’s a UK-adapted summary:
Navigating Mortgage Finance: Prequalification vs. Agreement in Principle (AIP) / Decision in Principle (DIP)
Shopping for houses can be fun, but putting together the financing to buy that dream home can seem complicated. A good first step? Getting an estimate of how much you may be able to spend and showing sellers that you’re a serious buyer. That’s where Prequalification and an Agreement in Principle (AIP) (also known as a Decision in Principle (DIP) or Mortgage in Principle) can help.
Let’s break down the difference and when to do which.
Mortgage Prequalification: A Good First Step (UK Context)
Getting prequalified at the start of your home-buying journey is a quick, easy way to see how much you may be able to qualify to borrow for a mortgage. All you need to do is give your lender (or a mortgage broker) some basic financial information like your estimated household income and debt, and you’ll get your estimated price range, often in minutes online.
In the UK, this is often a very informal process, sometimes done via an online calculator or a quick chat with a broker, where the information you provide may not go through a full verification process. As such, it typically doesn’t involve a credit check or, if it does, it’s usually a soft credit check which doesn’t affect your credit score.
It’s wise to recognise that the estimated amount you may qualify to borrow might be more than you’ll actually want to spend, allowing you to budget for other costs like furniture or home improvements.
When to Get Prequalified: Get prequalified before you start seriously house hunting, so you can feel confident you’re looking at houses in the right price range for you. It’s an excellent initial guide for setting your budget.
Key takeaway: Prequalification helps you see how much you might be able to borrow based on self-declared information.
Mortgage Pre-Approval (Agreement in Principle / Decision in Principle): Making it More Official (UK Context)
When you get pre-approved (which is typically what an Agreement in Principle (AIP) or Decision in Principle (DIP) is in the UK), the lender is giving you a conditional approval for a specific loan amount. You’ll give your lender more detailed financial information, like payslips, bank statements, and tax returns (e.g., SA302s/Tax Year Overviews for self-employed). They’ll then do a more in-depth review of your financial situation to determine the loan amount and terms they’ll conditionally agree to. Because the process is much more detailed, it takes a bit more time too – up to a few days in some cases, though many online AIPs can be instant.
An AIP/DIP can significantly help you in the home-buying process by allowing you to act quickly when you find the perfect home and proving to the seller and estate agent that you have the resources to make the purchase. If a seller’s getting multiple bids, having a mortgage pre-approval (AIP/DIP) can help you stand out from the rest as it demonstrates a more robust financial standing.
Credit Check for AIP/DIP: Most UK lenders conduct a soft credit check for an AIP/DIP, which does not leave a visible mark on your credit file for other lenders and does not affect your credit score. However, it’s always worth confirming with your chosen lender or broker.
When to Get Pre-Approved (AIP/DIP): You may want to get pre-approved (AIP/DIP) once you’ve already defined your price range, have engaged with an estate agent, and are actively shopping for homes. An AIP/DIP is usually good for 30-90 days, so consider applying for it when you’re ready to start making offers to ensure it doesn’t expire before you find a suitable property.
Key takeaway: Getting an AIP/DIP provides a more concrete borrowing figure based on verified (or at least formally assessed) information and helps demonstrate your seriousness to sellers.
Both prequalification and pre-approval (AIP/DIP) are useful tools to streamline the mortgage application process and get you from house hunter to homeowner. Using them at the right time can provide confidence in your budget and strengthen your position with sellers.