Will a mortgage agreement in principle affect my credit score?

What is an agreement in principle?

Investing in your next home with a mortgage allows you to secure the funds for the value of your property without having to wait years to save up to hundreds of thousands of pounds. Due to the size of a typical mortgage loan, providers will be wary about who they lend to. As part of the application process, you will be scrutinised against a number of criteria that will assess your borrowing history and current affordability.

A mortgage agreement in principle (AiP) is a hypothetical agreement between lenders and potential borrowers that indicates how much you could be eligible to borrow. Whilst a mortgage in principle does not determine that you will be approved on a mortgage application, it does provide some insight into whether your financial situation is ideal for a property purchase.

A mortgage AiP could increase your chances of successfully purchasing a property as it indicates to sellers and estate agents that you are prepared to progress through the purchase process.

Does it affect your credit score?

A mortgage agreement in principle is non-obligatory and has no lasting effect on your credit score. After requesting an AiP, the lender will request details of your income and complete a soft credit check for insight into your borrowing history.

Does a mortgage application affect your credit score?

Assuming there are no changes to your financial circumstances within 90 days of receiving your AiP, you will have a much better chance of having a mortgage approved. However, this is subject to a hard credit check performed following a formal application. During the application process, lenders will assess further details of your total income, credit history and financial commitments

Mortgage lenders will run a hard credit check, which could impact your score if your application is rejected.

What is the difference between soft credit checks and hard credit checks?

Throughout this article, we have discussed how an agreement in principle won’t affect your credit score, as a soft credit search is completed. But, a mortgage application will affect your credit score as a hard credit check is performed.

If you are wondering what the difference between these two types of credit checks is, you can expect the following:

A soft credit check requests surface-level detail from a credit referencing agency. They typically retrieve information like your overall credit score, and any emergent flags that could indicate serious issues and will confirm details like your current address. Anyone performing a soft credit check must be registered with a credit reference agency and provide a reason as to why the check is being completed. Whilst your permission is not required to complete the check, it provides harmless information that won’t affect your credit score.

Alternatively, a hard credit check is a detailed investigation into your borrowing history. These checks can only be completed with your consent and they are typically performed by mortgage providers who are looking to make an informed decision on your credit application. Whilst one or two hard credit checks over a long period of time won’t affect the integrity of your report, several within a short period of time could indicate that you are an unreliable borrower or that you are struggling to secure credit. Therefore it is essential that you keep hard credit checks to a minimum and ensure that you are fully prepared before making a credit application.

Ways to improve your credit score when buying a house

If you are wondering about the impact of an agreement in principle on your credit score, it may be an indication that your credit report needs some work. Whilst an AiP won’t affect your score, it is important to stay on top of any issues within your credit report as these could affect your formal mortgage application.

To improve your chances of being approved for a mortgage, here are some of our top tips for increasing your credit score:

• Correct information within your credit report.

Oftentimes, your credit score can look lower than it should if there is missing or incorrect information included within your report. To improve your score, you should ensure that all relevant credit cards, debit cards, accounts and addresses are up to date. If you have missed payments from several years ago, it is also worth having these removed from your report, as they can bring down your credit score unnecessarily.

• Register to vote.

While it may seem simple, registering to vote is one of the quickest ways to improve your credit score. This process can either be completed online or via the post and could make the slight difference between having a good and an excellent credit score. Lenders also appreciate when potential borrowers are enrolled to the electoral roll as it helps to validate your identity.

• Prove that you can manage credit.

Lenders perform credit checks in order to evaluate your borrowing history and assess whether you are able to make timely payments. If you don’t have any examples of borrowing history, it is difficult to prove that you are trustworthy. In the months and years prior to investing in property, it can be wise to demonstrate your ability to repay debt. This can include consistently using a credit card and making repayments each month or having an unsecured loan that is paid back in the agreed amount of time. These actions will slowly but surely increase your score, improving your chances of receiving a mortgage.

Final Thoughts

When buying a property with a mortgage, it is easy to become concerned about the state of your credit score. If you are not sure about the impact of soft and hard credit checks, it can seem uninviting to request a mortgage agreement in principle without realising the benefits you would be missing out on.

Fortunately, as only a soft credit check is required, mortgage AiPs do not impact your credit score in any way. On the other hand, hard credit checks could affect your ability to apply for mortgages, credit cards and other unsecured loans in the future.

If there are other topics surrounding mortgage applications or credit reports that you are unsure about, don’t hesitate to contact Eden Hawk Financial Solutions for more information. You could also consider registering to receive our quarterly newsletter via email.

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