Does an agreement in principle affect your credit score ?

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So you have found your perfect property, congratulations! Your next job to make sure you can qualify for a mortgage will be getting an agreement in principle, commonly also known as a mortgage in principle. 

By obtaining this, you will finally be able to secure your property with the seller and smoothly start your mortgage process. However, you need to be aware that an agreement in principle is a form of credit check. This means that depending on the lender, it may have an impact on your credit score.

What is an agreement in principle?

An agreement in principle is a document that states the maximum amount you can borrow from a lender. It can be easily obtained from a Mortgage Broker, or your chosen lender, either online or face-to-face, by completing a form outlining your earnings, deposit, and other relevant financial information. 

Unlike contrary belief, it does not guarantee that you will be able to get a mortgage, as you will still be required to pass the lender’s individual borrowing criteria further down the mortgage process. However, it will allow you to secure the property you want, and go ahead with the next steps of your mortgage.

Your estate agent or seller will most likely ask for your agreement in principle before taking the property off the market. They do this as it gives them peace of mind that you are able to afford the property and enables you to proceed with the sale. 

You may be worried whether your agreement in principle will affect your credit score - after all, it is a form of credit check. This all depends on the type of credit check that will be conducted in order to issue your AIP document.

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Types of credit checks

A credit check, also commonly referred to as a credit search, is when a financial institution checks your bank accounts in order to paint a picture of your current financial status and to understand your financial behavior. 

Credit checks can be carried out for different reasons, such as ensuring you are eligible for a loan, mortgage, or payment plan. Some credit checks may be carried out without your consent - however, there will always have to be a legitimate reason for them to do this.

In the majority of cases, you will be fully aware of when a credit check will be conducted on your accounts. Whether this will impact your credit score, will depend on the type of credit check it will be:

Soft Credit Inquiry:

Soft credit inquiry, or a ‘soft check’ typically occurs when a company or financial institution checks your credit as a form of a background check. A soft credit check only occurs for reasons unrelated to direct transactions or borrowing money. For example:

  • Utility companies may run a soft credit check to decide whether you are likely to make timely repayments on their services.
  • Insurers may run a soft credit check in order to help set premiums.
  • Your existing credit card supplier may run a credit check on you for the purpose of increasing your credit limit, or to decide whether they should offer you an additional service. 

Hard Credit Inquiry 

Hard credit inquiries, or ‘hard’ credit checks, normally occur when a lender or financial institution carries out a comprehensive credit check that will influence whether they may or may not lend you a set amount of money. This is commonly done when you apply for a loan, or credit card, and will require your authorisation before being conducted. 

Because a hard credit check is comprehensive and establishes your creditworthiness as a borrower, it may lower your credit score. It is unlikely that it will affect your credit score considerably, however, you may observe a slight decrease of a few points. 

One hard credit check is unlikely to be a cause for concern when it comes to the state of your credit score, but you may want to avoid making multiple credit or loan inquiries over a short period of time as this may have a more significant impact. 

Hard credit checks usually stay on your credit report for around two years. Therefore a lot of hard credit checks over a short period of time can potentially lead lenders to consider you a higher-risk customer. This is because individuals making multiple credit inquiries can be perceived as having financial difficulties, which will then reflect on credit, loan, and mortgage applications. 

Do you need to conduct a credit check to obtain an agreement in principle?

In order to issue an agreement in principle, a mortgage lender will have to run a credit check. Doing so, will enable them to have a look at your income, spending habits, and creditworthiness and help them decide what amount you could borrow. 

As one of the lender’s main jobs when lending money is to ensure they reduce risk on their end, running any form of credit check - even if it’s just a soft one, is an essential part of the process. This also offers some benefit to the borrower as it means that your mortgage in principle document is more accurate. 

By doing a soft credit check and having a look at your finances, the lender is making a more informed decision when issuing your MIP. This means that if you are unlikely to get a mortgage or your LTV ratio is lower than you expected, you will find out about this before going through with the sale. 

You will be glad to know that the majority of UK’s lenders, such as HalifaxBarclaysNatWest, and Nationwide, all state that they only conduct a soft check when generating a mortgage in principle document, which won’t impact your credit score. This, however, is still dependent on the lender, so it’s important to check their website or contact them directly to find out. 

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