Buy-to-let Agreement in Principle
Scott West explains how an Agreement in Principle for a buy-to-let mortgage works.
What is an Agreement in Principle? Why do I need an Agreement in Principle for a buy-to-let?
An Agreement in Principle (AIP), also known as a Decision in Principle (DIP), is a statement from a lender setting out how much it is prepared to lend you and the broad terms on which it would lend.
For a buy-to-let purchase it carries real weight. It shows that the lender is comfortable with the loan amount, the property, your credit profile and the affordability of the case — and affordability is the point on which most buy-to-let decisions turn.
It is also useful when you are buying, because an estate agent will usually want to see one as evidence that you have the means to complete.
How do I get an Agreement in Principle or AIP for a buy-to-let mortgage?
The route to an AIP is usually through a mortgage broker. A handful of lenders allow you to apply directly, but a large share of buy-to-let lenders work through brokers only, since most buy-to-let lending is not a regulated activity.
Your broker enters the required details on the lender's system. At this stage the information needed is brief — the fuller picture is built during the full application — so an Agreement in Principle is straightforward to obtain and can be turned around quickly.
Do I have to have an AIP through the estate agent I'm looking to purchase through?
No. You are under no obligation to use the agent's broker or in-house mortgage team, however firmly they suggest otherwise. There is no requirement for it. The pressure usually exists because the agent earns twice when you do — once on the sale and again on the mortgage.
Can I make an offer on a buy-to-let property with an Agreement in Principle?
Yes. You do not need a DIP or AIP in place to make an offer, though most estate agents will want to see one, or proof of funds.
Proof of funds applies where you hold enough cash to cover the purchase. You may not intend to use it, but a bank statement can demonstrate that you are able to buy.
In most cases an AIP helps the agent put your offer to the seller with confidence.
How do I apply for an AIP for a buy-to-let? How long does this take?
Most AIPs are returned instantly. We know straight away whether the case is accepted, referred or declined, and where it is referred or declined the lender will usually tell us why. Credit-related reasons are the exception — the response may say no more than 'failed credit score' or 'referred for credit review'.
Where there is an issue, we have the detail to act on it. We will keep you informed of what we are doing, and the result should come back immediately. Applying directly, you will find the process reasonably simple; coming through a broker, we set out the requirements with you first.
What information or documents do I need to get an Agreement in Principle for a buy-to-let mortgage?
For the Decision in Principle you do not need to supply proof of income or supporting documents. Those follow at full application, if the lender asks for them.
What your broker needs is your name, address and income, together with the details of the property and its expected rental income. None of this has to be evidenced at this point.
Getting those figures right matters, because your broker enters them as given and the Decision in Principle reflects what is put in. If you state the rental income as £2,000 and the valuer assesses it at £1,200 a month, the loan available to you can change materially.
Accurate detail at the DIP stage is what keeps your product consistent through to mortgage offer.
How is affordability calculated for a buy-to-let mortgage AIP?
Affordability rests primarily on the property's rental income. Whether the purchase is in your personal name or through a limited company changes the figures, and choosing a two year deal rather than a five year deal changes them again.
That accounts for the tax position. The calculation also builds in a buffer, so that a void between two tenants is covered and there is surplus left for repairs and maintenance.
To create that buffer, lenders typically require the rent to cover 125% or 145% of the mortgage payment. A broker can tell you the affordability that applies to your case, based on whether you are buying personally or through a limited company and on the product you choose.
Is an Agreement in Principle guaranteed? Can my buy-to-let mortgage be declined after an AIP?
An AIP is not a guarantee, and it can still be declined later. If the details behind the Decision in Principle are accepted but then change — through valuation, through the legal work, or through documentation about you — the case can change with them. The product, the lender or the loan amount may move, or the lender may decline.
This is why the right detail upfront matters: it is what allows the case to move smoothly through to offer. Anything that emerges partway through, or any change we were not aware of, can unsettle the whole application.
Will I need a credit check for a buy-to-let AIP? Does an AIP or DIP affect credit score?
That depends on the lender. Most run a soft search, which is visible to you but to no one else. If you look at your credit file you will see the soft search recorded; no one else can see it, and it does not affect your score.
A few lenders still run a hard search, which does register on your credit score, so it is worth asking your broker how a given lender will approach it. At this stage the check is largely concerned with your score and any recent missed payments that might bear on the application.
How will bad credit affect an Agreement in Principle?
It shapes the choice of lender, and it is likely to affect your product costs as well.
With completely clean credit you have the widest choice, because any product or lender is open to you. As your credit worsens, some of those lenders fall away.
Even so, options remain available with adverse credit. The key is being open with your broker about what sits on the credit report and when it happened, so that we can find a product that fits.
I've been declined an Agreement in Principle. What can I do?
A previous decline is not a problem. It usually means the case went to the wrong lender. We start by reviewing the information you gave that lender, check that the details we hold are correct, and then select a lender suited to your circumstances.
It may be that you applied to a lender that reads the credit score as a number, your score fell short of its threshold, and it declined on that basis. In that case we simply approach a lender that accepts the score you have.
It comes down to understanding why the case was declined and choosing a lender we can work with.
What are the benefits of getting an AIP with a mortgage broker?
A broker saves you time and effort, because we know which lender to approach first for your circumstances.
If a Decision in Principle is declined or referred, we can call the lender to resolve the point directly, or move you to a more suitable lender. It spares you a good deal of difficulty.
Your property may be repossessed if you do not keep up with your mortgage repayments.
Most buy-to-let mortgages are not regulated by the Financial Conduct Authority.
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