Whats Is Agreement in Principle

Agreement in principle, also known as decision in principle, is a term used in the finance industry to describe a preliminary agreement between a borrower and a lender. This agreement is an indication that the lender is willing to lend the borrower a specific amount of money subject to further checks and criteria. In this article, we will discuss the concept of agreement in principle, its benefits, and how it works.

What is Agreement in Principle?

Agreement in principle is a pre-approval of a mortgage loan. It is not a legally binding agreement but a preliminary confirmation that a lender is willing to lend the borrower a specific amount of money before they start the formal application process. It is based on the lender`s initial assessment of the borrower`s credit score, income, and other financial information. It is also known as decision in principle, mortgage in principle, or approval in principle.

Benefits of Agreement in Principle

Agreement in principle has several benefits for both the borrower and the lender, including:

1. Saves time: Agreement in principle can save time for both the borrower and the lender. The borrower can avoid applying for a mortgage that they will not be eligible for, and the lender can avoid processing an application that will ultimately be declined.

2. Helps in property search: When a borrower gets an agreement in principle, they have a better idea of their budget, which helps in the property search.

3. Competitive edge: A buyer with an agreement in principle may have a competitive edge over other buyers who do not have one.

How does Agreement in Principle Work?

The process of obtaining an agreement in principle involves the following steps:

1. The borrower fills out an application form and provides information on their income, expenses, employment status, and credit score.

2. The lender conducts a credit check and verifies the information provided by the borrower.

3. Based on the information provided and the lender`s assessment, the lender offers a preliminary decision on the amount they are willing to lend.

4. The borrower can use the agreement in principle to search for properties in their price range.

5. Once the borrower finds a property, they can submit a formal mortgage application, and the lender will conduct further checks on the borrower`s financial circumstances to determine if the offer can be made.

Conclusion

Agreement in principle can be a useful tool for borrowers to determine their budget and avoid applying for mortgages they are not eligible for. It can also give them a competitive edge in a property search. However, it is important to note that an agreement in principle is not a legally binding offer, and the lender may still decline the formal mortgage application if the borrower does not meet the necessary criteria.