An agreement in principle (AIP) is, as the name implies, a non-binding statement from a mortgage lender that outlines roughly how much they’d be willing to lend you, working off basic checks of your income, expenditure and credit report. The purpose of an AIP is to give an idea of your affordability before the true, in-depth mortgage application – it is not a rejection of any kind.
But how likely is it to go through as planned? In this guide, When the Bank Says No explores that exact question, as well as how to use the agreement in principle to reinforce your mortgage application, and more.
Do agreements in principle result in mortgage approval?
Roughly 90-95% of all agreements in principle result in progressing to get your mortgage approved via a legally binding contract, which occurs within three months of being issued. The reason that the remaining 5-10% get their mortgage declined after agreement is due to changes in the borrower’s financial circumstances, such as a job loss or new debts. This means that most agreement in principles will naturally progress towards approval, as long as the borrower’s circumstances remain the same.
That being said, conversions change with different lenders types:
- High-street banks – 90% conversion rate. High street banks are where the majority of standard borrowers go.
- Specialist lenders – 80-85% conversion rate.
Why do some agreements in principle fail?
The list of reasons agreements fail are as follows:
- Income or employment changes – Losing a job or dropping from full-time to part-time, or even switching roles to a lower paying role can invalidate the income you declared. The reason for this is because mortgage lenders want a borrower to remain in their position for at least 3 months into your mortgage application.
- Full credit check reveals issues – An agreement in principle uses a soft credit check, but formal applications utilise hard credit searches. This can expose your full credit history, including new defaults, arrears or undeclared debts.
- Too many credit applications – After an AIP, even browsing for additional credit can raise red flags. Every time a lender has to add a new hard credit search, your approval odds fall by around 2 – 3 percent. This means even one or two extra becomes too many credit applications for the lender.
- Lender’s valuation shortfall – If the valuation comes in 5 – 10% below the purchase price, your effective LTV jumps. This makes the deal riskier, and they may want you to fork over a larger deposit in a short space of time.
- Deposit source concerns – Lump sum gifts, inherited funds or rapid deposit increases trigger extra checks. 1 in 10 borrowers find their agreement in principle withdrawn.
- Outgoings underestimated – Full bank statements can highlight subscriptions, maintenance payments, car finance or other forms of consistent expenditure that weren’t in the original AIP, reducing how much they’ll lend.
- Self-employed or complex income – If you’re a contractor, freelancer or director then lenders will demand to see at least 2 to 3 years of accounts and SA302s. Future earnings are more uncertain for these types of employment.
- Time lapse beyond agreement in principle expiry – Most AIPs expire after 60-90 days. Property hunting delays can leave you needing a fresh agreement, and that restarts the clock.
- Changes in lending criteria – Both the financial market and lender risk policies shift, making what was previously acceptable void.
- Incomplete or incorrect documentation – Missing payslips, unverified address history or typos in key figures can delay or derail an application.
- Property-type restrictions – Non-standard constructions, short leases or unusual property uses sometimes fall outside of mainstream criteria.
How does a lender’s criteria affect a borrower’s chances?
After an AIP, the next stage is to initiate the full mortgage application. The lender then switches from a high-level “in-principle” to detailed underwriting, applying hard checks against your financial information:
- Debt-to-income ratios – This is the percentage of your gross annual income, and how much debt it goes towards, such as projected mortgage repayments, credit cards, personal loans and car finance. High street mortgage providers cap DTI at 40-45%, flexible or specialist lenders (self-employed applicants) may extend to 50%, but only if your credit history and financial stability are above board. 20% of all AIPs that have their DTI’s pushed above 45-50% are declined, as this signals too much debt.
- Maximum loan-to-value – LTV is the loan amount as a percentage of the property’s value. Higher LTV means you’re spending less on the deposit, but this also means you pose a higher risk to the lender. It’s not uncommon nowadays for first-time buyers to be offered 95% LTV products by mainstream lenders to help them onto the ladder, but more conservative lenders tend to cap at around 85% LTV for better interest rates. All in all, the lower the LTV, the better your chances.
- Stress tests and interest rate buffers – Lenders model your ability to afford repayments if interest rates were above 2.5 – 3% the current deal rate. Even if your AIP passes basic checks, failing the stress test will likely see your mortgage application declined, as it demonstrates that hardship may lead to the mortgage falling through.
- Credit checks and credit reference agencies – Your agreement in principle uses a soft search that doesn’t remain on file, whereas a hard search via agencies like Experian, Equifax etc will stay there for 12-18 months. Other lenders will be able to see this during the mortgage process, which may affect chances. Credit scores above 720 typically see 95%+ conversions, but scores below 600 is considered a poor credit history, and see conversions fall to 60 – 70%.
- Income verification and employment stability – Salaried applicants with steady income and W-2 or PAYE documentation typically see conversion rates of 92-95%. Self-employed borrowers face much stricter rules, requiring 2-3 years of SA302s and Accountants Reports, dropping conversion to 80-85%.
- Individual lender criteria & product selection – Specific lenders will have a public criteria, but internal risk teams can follow their own criteria, meaning two borrowers with identical circumstances can get different outcomes. To evade this, it’s best to opt for a mortgage broker, who are adept in understanding your chances beyond stated criteria.
- Financial stability and underlying risk factors – Mortgage providers look for savings buffers that could make up around 3-6 months of mortgage repayments in reserve, as well as few existing debts. Any large transactions will need to be explained.
- House type – Standard houses and flats are typically fine, but leaseholds under 70 years, unusual construction or non-standard uses (mixed commercial) can trigger mortgage rejection due to increased risk .
What do I do if my AIP is rejected?
If you have your mortgage declined after agreement, don’t fear. You can use this to better inform your next mortgage application:
- Get feedback – Mortgage providers are bound to tell you why your AIP has been declined. Whatever that factor is will likely continue to be an impediment to getting a mortgage deal until it is fixed. If the issue is credit history, then you should approach all three credit reference agencies and order a full report. Look for missed payments, defaults, or multiple recent hard searches. Even your current address being wrong can make a massive change.
- Tackle credit issues – It’s not uncommon for there to be incorrect entries. If you find them, raise a dispute. Afterwards, work on reducing your credit utilisation, keeping outstanding balances under 30% of your available credit. This can boost mortgage approval odds by up to 10%. Freeze any non-essential credit until after you’ve secured a mortgage.
- Strengthen your financial profile – Build savings for a deposit. If you’re a first-time buyer, having even 5% can make a huge difference towards getting a mortgage offer. If you’re recently changed jobs, wait until you’ve been in that position for at least 3 months with steady income.
- Seek expert help – A good mortgage broker knows which specific lenders will match your profile. When the Bank Says No has a vast network of both mainstream and specialist lenders who accept lower credit scores, or higher LTVs. If your situation is complex, a regulated financial advisor can create a tailored action plan to your individual circumstances.
- Consider alternative lenders and products – Different lenders have different criteria. One’s rejection could be another’s acceptable risk.
- Allow time – If you don’t allow time for incremental improvement between mortgage applications, lenders will see through this, especially if you’ve moved to hard credit stages. Failure may be a red flag, but showing that you can adapt and make changes is a huge green flag. After all, a mortgage deal takes place over a long period of time, and showing your ability to adapt to financial challenges will increase lender confidence.
Conclusion
Having your application declined either means you have some tweaks to do, or you haven’t found the right mortgage for you. Consider consulting with a mortgage broker to maximise your chances of having your mortgage approved. When the Bank Says No is one such broker, and our team has access to an extensive network of specialist lenders that can simplify the mortgage process, and enhance your chances of mortgage success.