Buy to Let Agreement in Principle

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ABC FinanceBuy to Let Agreement in Principle

Author: Lee Hemming CeMAP

20+ years experience in buy to let mortgages

If you are looking to purchase a property on a buy to let basis, you may need a mortgage to finance your investment. The application process for this is similar to buying a residential property, in that an agreement in principle will be required before you can make an offer.

An agreement in principle is a provisional agreement with a mortgage lender that they are willing to consider working with you. If this all sounds infuriatingly vague, this is unfortunately for a good reason. An agreement in principle is not a legally binding promise to loan you money – just an expression of willingness to consider your application.

Obtaining a buy to let mortgage in principle is usually comparatively straightforward. Your potential lender will ask for information about yourself, your monthly income, and your ongoing financial commitments, and decide if they consider your request for funding to be realistic and affordable based on the answers you provide.

Applying for a buy to let mortgage agreement in principle will not impact your credit score as lenders will only run a soft credit search at this point. If this does not bring up anything that causes the lender alarm, you will be invited to progress toward making a formal buy to let mortgage application.

What is a buy to let agreement in principle?

An agreement in principle (AIP) indicates how much a mortgage lender will be prepared to offer you on a buy to let mortgage and what you may expect to pay in terms of interest and setup fees.

An AIP is typically provided based on information you provide. You’ll explain how much you are looking to borrow and inform the lender of your monthly income and outgoing expenses.

Based on this information, the lender will give you an AIP based on what they think you can afford. You can use this AIP to demonstrate that you are serious about purchasing a home and can afford to do so.

Most estate agents will not allow you to make an offer on a property and thus remove it from the active market if you cannot produce this agreement, especially if they already have other interested parties. An AIP will typically be valid for up to 90 days.

What is the best way to get a mortgage quote for a buy-to-let property?

You will be welcome to approach a range of high street or online mortgage lenders to request an agreement in principle for a buy to let mortgage and compare offers, but this will be time-consuming and may soon start to feel invasive.

If you are not keen on explaining the ins and outs of your personal finances over and again, or would prefer to have somebody else do the legwork of comparing buy to let mortgage products to see who is offering the best deal, team with an experienced mortgage broker like ABC Finance.

ABC Finance will take the information that lenders will ask for before offering a buy to let mortgage agreement in principle and use this to track down the best possible deals for your needs – which could include lenders that do not work with the general public.

Enlisting the services of a broker will also enhance your chances of gaining an AIP that will eventually lead to a mortgage offer, as an industry professional can guide you through the remainder of the application process.

Who can get a BTL mortgage agreement in principle?

Most people over the age of 18 can get a mortgage in principle, assuming the repayments on the mortgage that will follow are realistically affordable. If you can prove that you have sufficient funds to pay a deposit on a property, the chances of gaining an AIP are further enhanced.

Like all mortgage application decisions, a lender will issue an AIP if they consider the potential rewards of allowing you to borrow to outweigh the risks. Some factors may act as stumbling blocks to gaining an agreement in principle for a buy to let mortgage. These include:

  • Lack of information surrounding potential rental yield or a business plan for anticipated rental income that does not match market rates.
  • Substantial outstanding personal debt.
  • A bankruptcy order or IVA against your name in the last six years.
  • Active CCJs or credit defaults against your name.
  • Refusal for a mortgage from the same lender or repossession of another property within the last six years.
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What do I need to provide to get an agreement in principle?

At the AIP stage, requests for information from your lender should be comparatively minimal. You will be asked to provide the following information for everybody who will be named on the mortgage:

  • Your personal details, such as full name and date of birth.
  • Complete residential address history for at least three years.
  • Details about your current property portfolio.
  • Details of your income, including your employer’s name and annual salary.
  • Information about any other properties you currently own and manage as part of a portfolio.
  • A summary of your monthly financial outgoings.
  • Information about your anticipated rental income, or if you are applying for a mortgage on a tenanted property, how much rental income is currently generated.

Most lenders will be willing to offer an agreement in principle based on your answers to these questions, only asking for documents to back up your application in the aftermath, but be prepared to provide payslips, property deeds, and bank statements just in case.

Keep reading – buy to let mortgage comparison

What does an AIP mean?

An agreement in principle means pretty much what the name suggests. Theoretically, a mortgage lender is prepared to lend you the money required to purchase an investment property. Consider this the first step toward raising the funds necessary to buy a house.

Theory and practice are two different things, so until this AIP is upgraded to a cast iron mortgage offer, you will not be certain that your mortgage will come through. While an AIP will allow you to pursue opportunities to invest in a buy to let property, you still have a way to go – and lots of paperwork to fill in! – before the process is complete.

When should I get a buy to let mortgage agreement in principle?

It’s advisable to apply for a buy to let mortgage agreement in principle once you have completed initial checks on your suitability for property investment, and have reason to be confident that your application will be accepted. Wherever possible, complete the following before applying for your buy to let mortgage AIP.

  • Identify a property you wish to purchase through a buy to let mortgage.
  • Use an online buy to let mortgage calculator and check how much monthly repayments may be. These tools are not always 100% accurate, but they will give you an idea of whether your intentions are affordable.
  • Source a deposit of at least 25% of this purchase price, as this will likely be the minimum sum requested on a buy to let mortgage.
  • Research the market rate surrounding rental prices in the area, drawing up a business plan explaining how your anticipated rental yield will exceed the monthly mortgage repayments. Most lenders expect rental income to total at least 130% of the mortgage repayments.

If your application for a buy to let mortgage agreement in principle is approved, you will receive a letter that confirms this. This AIP will usually be valid for around 90 days. If you do not set the ball rolling to upgrade this AIP to a complete mortgage offer within this timeframe, you may need to start the process again when you identify a new property. 

Does a mortgage in principle affect your credit score?

A mortgage lender will only run a soft credit check when offering an agreement in principle on a buy to let mortgage, so this will not negatively affect your credit score. This means the lender will ask a Credit Reference Agency (CRA) to verify that your data is accurate.

Do not withhold information surrounding credit arrangements to obtain an agreement in principle, as these will be revealed during this soft credit check. Equally, it is advisable to be upfront about any credit issues you have experienced in the last six years, as these will be revealed at this stage.

Does a BTL agreement in principle guarantee my mortgage?

You will likely get your mortgage once you reach this stage, but nothing is certain until all the relevant paperwork is signed. An agreement in principle is by no means a guarantee of a buy to let mortgage from your lender and is not a legally binding agreement.

Once you have an agreement in principle, you must back up your claims surrounding your income and expenditure. Your mortgage lender will review your bank statements to confirm that the data you provided is accurate and ask for payslips to verify your income. More information will be requested if your incomings and outgoings do not match the numbers you provided to obtain the AIP.

Your lender will also run a hard credit search following an agreement in principle. If this unearths anything you have not previously revealed, such as outstanding mortgage arrears, defaults on credit arrangements, or CCJs that have arisen since you received the AIP, you will be asked to explain these. At best, you may find that the lender amends their offer to a higher interest rate or demands a higher deposit, and at worst, it could see your AIP rescinded.

Can I get an AIP if I’ve got a bad credit history?

We have touched upon adverse credit history throughout this guide, and there is no doubt that a substandard credit score can make obtaining a buy to let mortgage agreement in principle more challenging. Challenging is not the same as impossible, though. Some lenders will still consider working with you if you can prove that your credit issues are in the past.

If you have a poor credit history, be upfront and honest about this from the beginning of your application. There is nowhere to hide when credit reports are run, and you will eventually need to explain why you experienced financial hardship in the past.

Attempting to pull the wool over the eyes of a mortgage lender will just delay the inevitable. It may also colour their view of your application if you come across as dishonest, whether by act or omission.

If you have a poor credit history but wish to invest in a buy to let property, it’s more advisable than ever to enlist the services of a mortgage broker like ABC Finance in your search for an agreement in principle.

Experienced buy to let mortgage brokers have access to specialist lenders that demonstrate greater flexibility than those found on the high street, and you are likelier to receive the AIP you seek.

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