Buy to Let Agreement in Principle
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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), which is also called a Decision in Principle (DIP), is a document from a lender indicating how much they’re willing to lend you, and outline the terms they’re prepared to offer you.
With Buy to Let, they’re crucial. It demonstrates that the lender’s happy with the loan amount, the property details, credit score and affordability, which is a key point for Buy to Let.
It’s very useful if you’re looking to purchase a new property because the estate agents will probably want to see these, to verify that you have the means to purchase.
How do I get an Agreement in Principle or AIP for a Buy to Let mortgage?
To get an AIP you’ll need to approach a mortgage broker and go through their process. There are some lenders you can do this with directly, but a large portion of Buy to Let lenders are broker only, because it’s not a regulated type of business.
A broker will go onto the lender’s website and complete the details required. Usually it’s quite brief, not a great deal is needed, as more information comes in during the full application. So an Agreement in Principle is fairly easy to obtain and can be done quite quickly.
Do I have to have an AIP through the estate agent I’m looking to purchase through?
No, you don’t – and don’t let them convince you that you do. It’s quite common for estate agents to insist that you use their broker or their in-house mortgage team. You don’t have to. There’s no requirement for that. They’re just trying to strong arm you because it means they earn twice – on the sale and on the mortgage side.
Can I make an offer on a Buy to Let property with an Agreement in Principle?
Yes, you can. You don’t need to have a DIP or AIP to make an offer on a property. However, most estate agents will probably want to see one, or proof of funds.
That might apply if you’re particularly wealthy and have cash in the bank that will cover the purchase costs. You may not intend to use it, but you could use a bank statement to show you can afford to buy.
In most cases, an AIP would certainly help the estate agent present your offer to the sellers.
How do I apply for an AIP for a Buy to Let? How long does this take?
Most AIPs are usually instant. We’ll know straight away whether it’s accepted, referred or declined. If it’s referred or declined, the lender will normally tell us why. We won’t necessarily get specifics if it’s credit-related, though – it might just say ‘failed credit score’ or ‘referred for credit review’.
But we get details if there’s an issue. We will let you know what we’re doing and it should be back instantly. If you’re submitting an AIP directly, you’ll see the process is fairly simple. If you’re coming through a broker, we’ll cover off the requirements with you.
What information or documents do I need to get an Agreement in Principle for a Buy to Let mortgage?
To get the Decision in Principle, you won’t need to provide any proof of income or other details. Those will come during the full mortgage application if the lender requests them.
All the broker will need is your name, address, your income and details of the purchase property, including the expected rental income. There’s no proof required of those at this point.
But it’s key that you get those details right, so your broker can input the details correctly and your Decision in Principle accurately reflects reality. If you tell the broker that the rental income is £2,000 and the valuer says it’s worth £1,200 a month, it could dramatically impact your loan.
Giving the right details up front for that DIP ensures your product matches when you get to mortgage offer.
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How is affordability calculated for a Buy to Let mortgage AIP?
Affordability is primarily based on the property’s rental income. If it’s a personal or limited company purchase, the numbers will change. If you’re going for a two year deal as opposed to a five year deal, it will change again.
That covers off the taxation point. You need to build in a buffer so that any rental vacancy between two tenants is covered. There also needs to be enough surplus there to cover repairs and maintenance.
So the lender’s calculations require 125% or 145% of the mortgage payment to be covered by the rent, to make sure there’s that buffer. A broker will be able to tell you your affordability based on whether the purchase is personal or through a limited company, and your product choice.
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 be declined later. If the details we gave for the Decision of Principle are accepted, but those details change later on – through valuation, through legal or through documentation about yourselves – the case might change. The product, lender or mortgage value might change, or the lender might decline the case.
So it’s imperative that we get the right details upfront to ensure a smooth transition through to offer. If anything crops up in the middle that we didn’t know about, or something changes, it can throw the whole case out.
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. The majority do a soft search, which is visible to you but nobody else. If you log onto your credit file, you’ll see that there’s been a soft search on you. Nobody else will see that and it won’t impact your score.
A few lenders still do hard searches, and those will impact your credit score. So just be mindful of asking your broker how that might work. The credit check at that point is largely looking at your score or any recent missed payments etc., that might impact the application.
How will bad credit affect an Agreement in Principle?
It will change our lender choice and it’s likely to change your product costs, as well.
If you’ve got completely clean credit, you’ve got more options – because you can pick any product or lender you like. As your credit worsens, more of those lenders become unavailable.
But even with very bad credit, there’s still a lot of options out there. It’s just being transparent with your broker about what’s on the credit report and when it happened – then we can find a product that suits you.
I’ve been declined an Agreement in Principle. What can I do?
If you’ve already been declined, it’s not a problem. It just means that you went to the wrong lender. We’ll go through, firstly, what information you gave the previous lender and we’ll check that the information we have is correct. We’ll then pick a lender that’s appropriate.
It might be that you submitted an application to a lender that looks at the actual number of the credit score, it just wasn’t high enough and that lender declined you. We simply go to a lender that will accept that score.
It’s all about understanding what it was declined for and picking a lender that we can work with.
What are the benefits of getting an AIP with a mortgage broker?
A mortgage broker can save you time and effort – simply because we know who to speak to first based on your circumstances.
If a Decision in Principle is declined or is referred, we can phone the lender and either work with them to resolve a point, or move you to a lender that’s more appropriate. We just save you a lot of headaches.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST Buy to Let MORTGAGES.
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