APPLY FOR A MORTGAGE AGREEMENT IN PRINCIPLE (AIP)
The AIP is an agreement to provide a mortgage for the purchase price of the property in question. The AIP will usually state that how much money you are able to borrow will be based on further searches by your lender. This means that when you give notice on your current home, this starts the start of the 14/28 day search period.
During this search period, your lender is checking that your income and expenditure are reflected in the accounts you have given to them to assess how much you can borrow. They may contact your employer, bank or utility providers for information about you. The AIP itself will only be valid for a short time - generally 28 days. After that time, the AIP expires, if your lender hasn't asked you for information to support it.
The lender should arrange valuation at this point. Under normal circumstances, the purchase cannot complete until after this valuation has been carried out. This is why it is important that any property bought using a mortgage must be independently valued before completion because all lenders will ask to see this valuation report before completion of the purchase.
AIPs are risky as they can be cancelled at any time during the search period. A new AIP must then be applied for, which means another 28-day period will start on first submission. This may make it necessary to delay completion on the sale of your current home.
The AIP is a conditional offer from your lender that they will provide the mortgage you have applied for if certain conditions are met. The most common condition is that you can afford it - in other words, that anything in your accounts which has been agreed before the start of the search period (such as your income and outgoings) are supported by evidence that your lender can use. If any aspect of what you have said has changed after you give notice on your home, then the AIP may be withdrawn and a new one should not be applied for.
Before signing an AIP it is important to understand exactly what it says. It should say how much money the lender is prepared to let you borrow, on what terms, and what conditions need to be fulfilled. It should not contain any unauthorised deductions from the mortgage funds.
The AIP should clearly state how long it is valid for and that a new one must be applied for if necessary because things change during the search period. The AIP should contain the conditions that need to be fulfilled before the lender will make you a formal offer of their mortgage, and any terms or conditions under which either your AIP may be withdrawn by them or they are entitled to withdraw the offer of a loan.
It should also state whether you must provide written confirmation that all information provided for assessing eligibility for a mortgage is accurate and complete, and that you agree to repay within a period of time the amount of any shortfall between the money lent and the purchase price.
It will usually contain a statement saying how much money your lender is going to allow you to borrow after completing their search for information, but this should not be accepted as an absolute figure. If it isn't, you should ask if they are prepared to give a provisional figure.
The AIP should specify the terms on which the lender is offering you their mortgage, for example if any of these are unacceptable to you you should try to negotiate them before signing the AIP. Points to look out for include:
If you are not happy with the AIP you have been offered, it is probably best to ask your lender to re-do it.
Before signing an AIP, check that your name is spelt correctly and that what you think is written there actually is; check where and when the AIP was issued; make sure you understand all the terms of the AIP.
The AIP should be signed by you and your lender, or your solicitor if it is being sent to him/her on your behalf. Make sure that all corrections are initialled by both parties and that everything has been corrected before you sign. If there are additions, they should be initialed as well, but the AIP must remain exactly as originally offered.
An AIP is not an offer of a loan, or evidence that you will be able to obtain one; it is simply an indication of your lender's willingness to lend on certain terms under specific conditions. It should state these clearly and may be subject to changes which may reduce the amount that will be lent.
It is important that you do not assume that the AIP will allow you to borrow from any other lender as well, without a further application for a mortgage offer. If your lender declines to make a loan on similar terms, there is no guarantee that any other lender will make one either.
Changes in circumstances may affect an AIP. You must notify your lender of any changes in circumstances which have occurred since you gave written notice on the sale of your old home.
There is no guarantee that a new AIP will be offered if things alter after the start of the search period, and the AIP may be withdrawn altogether. This does not mean that you cannot have a mortgage, just that the lender will not give it to you on these terms.
For example, if your old house sale falls through because your buyer's solicitor does not complete within a reasonable time, or if other problems arise during the search period such as an unsatisfactory survey of your new home, this may justify withdrawal of the AIP.
This means that you are no longer on these terms with your lender, but doesn't affect any other possible offers of finance from other lenders. However, you may find it difficult to get another AIP offer if things go wrong because some lenders are wary of changing circumstances which give rise to the withdrawal of an AIP.
Another example is when you already have a mortgage, but your lender agrees to release the old one and allow it to be replaced by a new one.
The AIP should tell you how long the search period will last from the date on which your lender obtains all information necessary to complete their assessment of your application. This cannot be less than 28 days nor more than 56 days unless your lender considers that exceptional circumstances justify a shorter period.
If you are applying for a mortgage in June, say, then the search period cannot start any earlier than 1st May. Your AIP should state when it began and when it will end. If it is issued in draft form, your lender will normally send you a 'proof' copy before it is actually issued so that this start and end date can be confirmed.
After accepting an AIP it is important to complete the search for a home as soon as possible, otherwise the offer of mortgage terms may lapse before you have completed on your new purchase; most lenders state one month as the maximum time they will give you to complete and some may withdraw their offer of finance if it has not been accepted by that date.
If you need more time, discuss with your lender how much longer they will allow; this may be up to a year, but could be less. Some lenders permit an extension of only 28 days, but most will extend the search period for up to one year.
If there are changes in circumstance during this extension period, you must tell your lender immediately so that they can review the terms of the AIP with you. For example, if you have increased or decreased your salary since applying for a mortgage or have suffered an illness which is unlikely to recur or have an increase in your credit commitments or if interest rates have changed.
If you cannot meet the repayment arrangements of the AIP, you should discuss with your lender how an alternative arrangement might be made for a limited time only. This normally means cutting back on expenditure on non-essentials until better times arrive, but it could also mean selling one property to reduce the loan on another.
This could be considered if you cannot sell your existing home within a reasonable time, or if your financial situation alters unexpectedly.
So, to sum up: If you are applying for an AIP and things change before the search period ends (including the offer being withdrawn) then the lender might ask you to repay any difference between what they would have lent and what is actually worth. For example, if the house falls in value by £10k then that loss will be charged against you. You are not required to repay the AIP if there is no change in property price even though it might be the case that you are now able to afford a more expensive house.
When applying for an AIP lenders will look at how you've managed your money in the past and make judgements based on this history. If it turns out that, had they known something about your financial situation before approving the application, they wouldn't have given you the AIP, then you might be asked to repay the AIP.
Generally speaking, if your credit reference file doesn't get updated to show that an AIP has been repaid or declined within 6 months of it being granted, lenders will assume that you decided not to proceed with the purchase and so they'll remove the information about the AIP from your file. This means that you should check with lenders after this period to ensure that they have updated your credit reference file.