Many homebuyers come across the terms “agreed in principle” or “decision in principle” (DIP) as they start their property buying trip. The original agreement from a mortgage lender is a vital first step to secure a home loan. This helps buyers understand their potential borrowing amount.
Credit checks, affordability assessments, and interest rate considerations are the foundations of a decision in principle. Buyers need to know what a DIP means and how to apply for one. The process affects credit scores and plays an essential role in property buying. This knowledge helps buyers make better decisions that strengthen their position in the property market.
What is a Decision in Principle?
A Decision in Principle (DIP) represents a mortgage lender’s written indication about the amount they might lend to a borrower. This assessment is a vital step in the mortgage application process.
Definition and alternative names
Mortgage lenders use several interchangeable terms for this original agreement. These include:
- Agreement in Principle (AIP)
- Mortgage Promise
- Approval in Principle
- Lending Certificate [13, 29]
Purpose of a DIP
A Decision in Principle plays a vital role when you buy property. It helps buyers understand exactly how much they can borrow and lets them search for homes within their price range. Estate agents and sellers use this document to verify that buyers can actually afford the property they want to purchase.
Non-binding nature of a DIP
A DIP shows that a lender is ready to give you a mortgage, but it’s not a binding agreement or final approval guarantee. The actual mortgage offer might be different from the original DIP once the lender gets a full picture of several key factors:
- A complete review of your income and spending
- All supporting documents
- The underwriter’s evaluation
- Results from property valuation
DIPs usually stay valid between 30 to 90 days based on each lender’s rules. The DIP could become invalid if your financial situation changes during this time – like getting a new loan or your income going down.
The DIP Application Process
Getting a Decision in Principle needs careful preparation and attention to detail. Applicants should understand the requirements and steps to guide them through this significant stage of mortgage acquisition.
Information required for a DIP
DIP applications need detailed personal and financial information from applicants. The documents you need include:
- Photo ID (passport or driving license)
- Utility bills that prove your current address
- Your address history from the last three years
- Proof of income (3-6 months’ payslips if you’re hired, SA302s for self-employed people)
- Bank statements from the last three months
- A list of your existing credit commitments and regular expenses
How to apply for a DIP
You can get a DIP through several different ways. Banks and building societies offer direct applications, while online platforms and mortgage brokers provide alternative routes. The execution-only route works best if you have good knowledge of the mortgage application process and already know your preferred product.
Lenders use their calculator to check affordability automatically and run credit checks. Your information needs to match across all documents because any inconsistencies could affect your final mortgage application.
Timeframe for receiving a DIP
DIP processing happens faster than a complete mortgage application. Lenders typically send results within 24 hours, and some can give decisions in just 15 minutes. Each lender sets different validity periods that last between 30 to 90 days. To cite an instance, Nationwide gives applicants 90 days, while Santander’s DIPs stay valid for 60 days.
Applicants can request a new DIP if their original one expires before they find the right property. The DIP process moves quickly, but a complete mortgage application needs about a month to process.
Importance of a DIP in the Home Buying Process
A Decision in Principle serves as a valuable tool that substantially boosts a buyer’s position in today’s competitive property market. This financial tool can determine the success of your property purchase. Smart buyers who understand its importance gain a clear advantage when competing for their desired properties.
Proving your borrowing capacity to estate agents
Estate agents and sellers want proof that you can afford a property before they show you around. A DIP is solid proof of your borrowing power and shows estate agents you’ve passed initial financial checks. This verification is vital in competitive markets. Some agents won’t even let you view properties without seeing a DIP first.
Establishing a realistic budget
A DIP gives buyers a clear roadmap for their property search. Buyers can understand their exact borrowing capacity and avoid wasting precious time on unaffordable properties. The search becomes more focused when buyers know their achievable price ranges.
Smart buyers use this early assessment to protect themselves from disappointment. They won’t fall in love with properties beyond their budget, which makes their house-hunting journey practical and smooth.
Strengthening your position as a buyer
A DIP boosts a buyer’s negotiating power in several ways. Making an offer with a DIP proves the buyer has already taken concrete steps to secure financing. Sellers see this documentation as proof that the buyer means business and has financial readiness – an advantage that matters especially when you have multiple offers on the table.
Your DIP can accelerate the entire purchase process because sellers know you’ve completed the original financial checks. This benefit proves extra valuable in ever-changing markets where properties sell quickly. The DIP positions you as a credible and prepared purchaser ready to move forward.
Potential Impact on Credit Score
Borrowers who worry about their credit profile need to know how Decision in Principle credit checks work. The effect on credit scores depends on the check type and each lender’s specific methods.
Soft vs. hard credit checks
Lenders use two different types of credit checks during a DIP application process. A soft credit check looks at the borrower’s credit report without leaving any marks. This lets borrowers check their options while keeping their credit score safe. Lenders can give their lending decisions quickly based on this first look at the borrower’s credit profile.
A hard credit check works differently. It shows up as an official record on the credit report and tells others you’ve applied for credit. Your credit scores will take a small hit when lenders run a hard check. FICO scores typically drop by less than five points.
Multiple DIP applications and credit score
DIP applications can affect your credit score by a lot based on their frequency and timing. Multiple hard credit checks that happen close together might worry lenders because these checks could point to money troubles. But credit scoring systems now protect borrowers who shop around for rates:
- FICO scores think about similar applications as one single inquiry when they happen within 45 days.
- VantageScore bundles multiple applications together in a 14-day window.
Duration of DIP validity
A Decision in Principle remains valid between 30 to 90 days, depending on the lender. Borrowers can search for properties and negotiate deals with their DIP during this timeframe without needing extra credit checks. Any major changes in financial status, like new loans or changes in income, could make the DIP invalid before it expires.
UK mortgage lenders generally employ soft credit checks for DIPs these days, which helps protect borrowers’ credit scores. Borrowers should check what type of credit assessment their chosen lender performs because different institutions handle this differently.
Conclusion
A Decision in Principle is a vital first step when you buy property. It gives potential homebuyers a great way to get clarity about how much they can borrow. This full picture helps buyers look at homes they can afford and shows estate agents and sellers they mean business. The document helps you streamline property viewings and gives you a stronger position during negotiations. You need this essential tool when you enter the property market.
Managing your DIP application process is important, especially when you have credit checks and validity periods to consider. You need to protect your credit score and keep your borrowing options open. Most lenders now run soft credit checks for their original assessments. This lets buyers explore different options without hurting their credit profiles. A valid DIP gives prospective homebuyers the confidence they need during property viewings and negotiations. They know they’ve taken a big step toward owning their dream home.
FAQs
What exactly is a Decision in Principle (DIP)?
A Decision in Principle (DIP) is a preliminary confirmation from a mortgage lender indicating the amount they might lend you for a mortgage. It is also referred to as an Agreement in Principle, a Mortgage in Principle, or a Mortgage Promise.
What other names are used for a Decision in Principle?
A Decision in Principle is also known by other terms such as an Agreement in Principle or a Mortgage Promise. It represents a lender’s initial assessment of how much they could potentially lend you based on the information you provide and their preliminary checks.
Does obtaining a Decision in Principle involve a credit check?
Yes, when you apply for a Decision in Principle, the lender conducts a “soft” credit check. This preliminary credit inquiry does not impact your credit score and is part of the process to estimate how much they might lend you. It is also known under terms like Mortgage in Principle or Agreement in Principle.
Is it possible for a mortgage application to be rejected after receiving a Decision in Principle?
Yes, receiving a Decision in Principle does not guarantee final approval for a mortgage. A mortgage can still be declined after this stage if the lender’s comprehensive review of your full application reveals issues or discrepancies that do not meet their lending criteria.