Does an Agreement in Principle Affect Your Credit Score

22nd Oct 2024

Congratulations on finding your ideal new home and having an offer accepted! Your next step towards securing a mortgage is applying for an agreement in principle (AIP), also known as a mortgage in principle. This essential piece of documentation is what you can show to the estate agent or seller to that you are a serious buyer and are in the right financial position to go ahead and make the purchase. However, it's important to remember that getting an AIP involves a credit check, which could impact your credit score depending on the type of check the lender performs.

What is an Agreement in Principle?

An agreement in principle is a document from a lender such as a bank or building society which states the maximum amount they are willing to lend you, given your financial circumstances. You can get an Agreement in Principle through a mortgage broker or directly from a lender, either online or in person. You will have to provide them with lots of information about your income, deposit, and other financial details.

An AIP isn’t a cast-iron guarantee that a full mortgage approval will follow. You will still have to go through the full mortgage application process with your chosen lender. However, it does show sellers and estate agents that you are a serious buyer, enabling you to proceed with the property purchase. When the property market is very busy with houses selling almost immediately they come on the market, some estate agents will only book viewings for people who have already got their AIP in place.

Agreement in Principle and Your Credit Score?

Getting approved for an AIP involves a credit check, and whether it impacts your credit score depends on the type of check performed:

• Soft Credit Inquiry: This type of check does not affect your credit score. It is often used for background checks or pre-approval offers marketed as “check whether you’d be approved”.
• Hard Credit Inquiry: This is a more thorough check that can affect your credit score. It is typically used when you make a firm application for credit products, including mortgages. While a single hard inquiry may only lower your score by a few points, multiple inquiries in a short period can be more impactful as lenders may think that you are in financial trouble and applying for lots of credit options.

Most large UK lenders, such as Halifax, Barclays, NatWest, and Nationwide, usually run a soft credit check when issuing an AIP. However, it's always advisable to confirm the type of credit check with your lender before going ahead. If you are using a mortgage broker to help you find the best deal across the whole mortgage market, they should be aware of soft and hard credit checks when getting you an agreement in principle. You don’t have to apply for your mortgage with the same lender which has issued the AIP, but many buyers do, just to streamline the process, and because they know they stand a better chance of being accepted.