Article by Jamie Mackenzie Smith - 17th August 2021

Why Mortgages Might Be Agreed In Principle Then Declined

Getting your mortgage Agreed in Principle (also known as a Decision in Principle or AIP) is an important step towards finally getting into a new home, but the relief of getting an AIP can be short-lived if you then get turned down when applying for the actual mortgage. That’s the sad reality for many who get an Agreement in Principle: they find the perfect house, go through with a full application and... fall at the final hurdle.

Thankfully, rejection by one mortgage provider doesn’t mean that every lender will do the same, and it shouldn’t stop you from applying elsewhere. The key thing to bear in mind is that if you find yourself in this situation, there’s a good chance that it’s due to information held on your Credit Report and it might be something you can act on. For that reason alone, it’s vital that you check it for yourself well ahead of time.

To see the UK's most detailed Credit Report, you can try checkmyfile free for 30 days, then for just £14.99 a month afterwards, which you can cancel anytime.

What is an Agreement in Principle?

An AIP is a guide of how much that particular lender would be prepared to offer you, based on an initial application form and often a soft search of your Credit Report.

It is not a guarantee that the lender will definitely accept a mortgage application from you. Instead, it gives you an idea of your affordability and it’s just one important step towards finally obtaining a mortgage.

Crucially though, if you receive an Agreement in Principle but are declined when you submit the actual mortgage application, it’s likely that whatever information led to your rejection will be visible to other mortgage lenders as well. It’s therefore important to identify the problem on your Credit Report so you know exactly what’s affecting your approval chances.

Why was I approved and then declined?

First off, remember that the Agreement In Principle is just that – it’s not a promise to lend, just an indication of how much a lender might be willing to give you provided nothing significant changes between then and when you submit your final application. You might not be given a definitive answer as to why you have been declined (unless you simply can't afford the mortgage), much like any other type of loan, but these are among the most common reasons:

  • Changing jobs
  • A significant change in income or outgoings
  • Taking out a new form of credit
  • Missed payments & arrears that hadn’t come up during the AIP
  • Financial Associations with credit problems
  • Not meeting other lender-specific criteria
  • Lack of consistency/application discrepancies
  • Information held at a different Credit Reference Agency

Changes to job & income

Changes to your personal circumstances between getting a Decision in Principle and the final application might affect the outcome. Commonly this can be affected by a change of job (even to a higher paid one), because lenders find it harder to assess whether it is a consistent source of income for you.

Some lenders look at how long you’ve been in a job as an indication of your overall stability, reasoning that the longer you’ve been there, the more likely you are to have a set income for the duration of the mortgage.

Changes to your income could also make a difference. If you haven’t yet had any payslips that verify your income it might be difficult to prove.

Don’t be tempted to try hiding a change in circumstances – not only could it lead to problems in the future in terms of being able to afford repayments, but it’s also not a great idea to try and manipulate an application with what would be material falsehoods.

Taking out a new line of credit

When looking at your credit history, in most cases lenders will see six years of payment history, including whether payments were made in full, on time or whether they were made at all. What mortgage lenders don’t want to see is a freshly opened form of credit, whether it be a new credit card, loan or finance agreement.

The reasons for this are twofold: firstly, it will affect your affordability, which is the measure of whether you can afford to make monthly payments. Secondly, if you already have existing credit facilities and you take out a new credit card, lenders can feel uneasy if it looks like you have the potential to borrow far beyond your means in a short space of time.

Missed payments or arrears

Even if your credit history up to now has been spotless, accumulating missed payments and arrears on your Credit Report shortly before formally applying for a mortgage is going to call into sharper focus whether your current circumstances make you a good potential customer.

The average lender is unlikely to have a major issue with an occasional missed payment appearing on your Credit Report, especially if it happened a long time ago and is an isolated incident among lots of other payments made 'on time'. Recent entries, however, are more likely to be scrutinised by prospective lenders as potential first signs of financial stress. That means that it’s more important than ever to ensure that nothing adverse gets recorded around the time that you’re applying.

Financial Associations

If you have a Financial Association on your Credit Report, prospective mortgage lenders will have the ability to check their Credit Report in addition to your own. This might not be picked up during an Agreement in Principle, but almost certainly would be when the time comes to apply for the mortgage itself.

A Financial Association itself is not a bad thing – they’re perfectly normal – but you don’t want to be affected by a link that’s no longer applicable. You can find out more about how this works by reading our guide to Financial Associations.

Not meeting the lender’s specific criteria

Even if you perfectly match the terms set out by the lender when applying, there’s always plenty of requirements made by the lender that you’ll need to meet that you won’t even be shown. This might be something like a specified credit utilisation ratio, if you’re single or married, in full-time employment or self-employed.

Often this relates to the lender’s own internal criteria, and just because you might not be what one lender is looking for, doesn’t mean you’ll be turned down by the next one you try with.

Lack of consistency or discrepancies

It’s vital that you’re completely upfront about the key facts – the level of checks that a lender will carry out means that any information you accidentally omit or ‘tweak’ will be found out anyway, and if it means you suddenly don’t meet the criteria, your application could well be turned down.

Information held at a different Credit Reference Agency

The amount of money involved in mortgage lending means that lenders don’t take chances. It’s likely that they will check your Credit Report at more than one Credit Reference Agency when it comes to your full application. Because they might not go into as much depth on the initial AIP check, there’s a chance that previously unseen information will come to light. This is because each CRA updates and maintains information independently and will take data from a slightly different set of lenders. Even errors (though rare) in data can happen at one CRA, but not another. The only way to know the state of your Credit Report is to check it for yourself.

What is checked in an Agreement in Principle vs a mortgage application

Even if you decide to apply for a mortgage from the same lender that you get a Decision in Principle from, there are slightly different checks for each stage, which can explain why you might pass one but not the other.

Most mortgage lenders will use a Soft/Enquiry Search when they perform an AIP. This has the advantage that you don’t have to worry about the effect that accumulating a large number of hard searches on your Credit Report in a short space of time can have on your credit rating and ability to take out credit. One downside to this is that the lender may not see your full credit history, which is one of the main factors taken into consideration when applying for a mortgage, or indeed any form of credit.

An important difference is that an AIP is not legally binding, and the lender will retain the right to offer you a different amount or mortgage product (and interest rate). Some lenders might even withdraw their offer altogether.

Even with these possible changes in mind, an Agreement In Principle is an important step towards securing a mortgage and buying a house. It might even make you aware of something that you weren’t expecting, that in some cases you can remedy.

Agreement in Principle checks

Agreements In Principle are primarily designed to assess whether you can afford the amount you’re looking to borrow, based on a lending multiplier that’s applied to your income. Your outgoings are also factored into this and so will the lender’s individual criteria (what sort of ‘risk profile’ they are happy with, the mortgage term etc.). The check usually assesses:

  • Your stated income: This will not be verified at this stage, but if you subsequently state a different amount on your full application, it could cause problems
  • The value of the property you’re looking to buy: This is used to establish your Loan to Value (LTV)
  • Monthly outgoings: Specifically related to other credit agreements you may have in place, but also covers things like school fees and pension contributions. Day-to-day expenses like food and petrol are not specified
  • Current and any previous addresses: This is partly used to gauge your potential ‘stability’ as a borrower, but also to ensure there are no gaps in your credit history
  • Your 'public' Credit Report: Key information including your presence (or lack of) on the Electoral Roll and any Court Information will come to light in this check
  • Your estimated retirement age: This is a key consideration – lenders will want to be sure that you plan to work (or have an income) for long enough to cover the mortgage term
  • Lender’s criteria: Each lender has its own criteria, which is not made publicly known at any point. Regardless of the size of your deposit or your income, if you’re not what the lender is looking for in a customer, you might get turned down. It’s likely that most of these considerations will be checked when you go through the AIP, but there’s always a chance that something crops up in the full application that forces the lender to reconsider.

Mortgage application checks

Like an AIP, when you apply for a mortgage your income and outgoings will be checked to make sure you will be able to afford the mortgage you are applying for – in fact, they’ll be put under the microscope. The big difference between the two checks is that the actual application will involve an Application/Hard Search of your Credit Report, which will disclose everything held and as mentioned previously, is likely to involve a check at more than one Credit Reference Agency.

  • Credit History: Your Credit History is one of the single most important factors taken into consideration when you apply for any form of finance, and this is arguably never truer than on your mortgage application. A lengthy history of borrowing and repaying credit in full and on time will prove to a lender that you’re likely to do the same with a mortgage. However, lenders will similarly take missed payments and defaults as a sign of what they might expect if they were to lend to you – making them understandably more reluctant
  • Financial Associations: If you’ve held a credit agreement with someone else in the past, they will appear as a Financial Association on your Credit Report. Lenders can search associates on your Credit Report, and if they have a poor credit history, it can affect your ability to get a mortgage
  • Fraud warnings: Fraud warnings shouldn’t prevent you from taking out a mortgage; however, if they are present as a result of you mishandling your credit facility or for falsifying information on previous credit applications, you could be declined on this basis or at the very least see your application delayed – not something that anyone wants
  • Payday loans: If a lender sees you’ve borrowed from a payday lender it might take this as a sign that you’ve experienced severe money problems. Payday loans aren’t a great thing to have on your Credit Report, but the impact will vary from lender to lender, and according to the extent to which they have been utilised
  • Errors: It’s not often that you’ll be turned down for a mortgage solely on the basis there are errors on your report, but making sure all your information appears as it should means that you’ll have the best chance of getting accepted
  • Other Credit Applications: Each lender will approach this slightly differently, but some lenders will be deterred by a Credit Report that has a large number of applications in a short period of time showing on it

In short, there could be any number of reasons that at first glance you might seem like the perfect potential customer to a mortgage lender, only for them to change their mind when you actually go to apply for a mortgage. That shouldn’t put you off applying somewhere else, because it could be something as simple as not meeting their criteria for something that other lenders might take a completely different approach on.

Why get an agreement in principle?

While they don’t make any kind of guarantee that the mortgage amount they’ll offer will closely resemble the amount they could give you (if they decide to take you on board as a customer at all), Agreements in Principle are still a key part of getting a mortgage and buying your home.

For one thing, they will give you a 'ballpark' figure for how much you might be able to borrow, which gives you an idea of the sort of price range you should stick to when choosing a house, which will help you narrow down the kind of properties you can realistically afford.

Additionally, many estate agents (or vendors) won’t even consider taking a house off the market if you haven’t got an AIP, because it means they have no idea whether you’d even be considered by a mortgage lender for the amount of money you’re looking to borrow.

Perhaps most importantly, if you do apply for an Agreement in Principle and you’re declined at this stage, it still gives you time to work on improving the information on your Credit Report, which could improve your chances the next time you apply. You might need to look at alternative properties, should the one you had your eye on get sold, but it will reduce the chances of further disappointment in the future.

These days many lenders offer free online AIP checks that assess your overall affordability, with results available to view online within minutes of applying - so you’ve got nothing to lose by checking.

Does being turned down affect my Credit Score?

Being declined for either an AIP or an actual mortgage application won’t have a negative impact on your Credit Score, as other lenders can’t see the outcome of a credit application, so it is unlikely to have any further effect on your ability to take out credit.

What can affect your creditworthiness is applying for too many forms of credit in a short space of time – which lenders could interpret as a sign of financial distress.

If you are declined – either for an Agreement in Principle or a formal mortgage offer – it’s strongly recommended that you check your Credit Report before heading off to apply elsewhere. Not only will it show you if there are any glaringly obvious errors on that lenders might not want to see, but it can also help you in getting accepted for some of the best mortgage deals.

If you haven’t already, you can try checkmyfile free for 30 days, then for just £14.99 a month afterwards which you can cancel online at any time, or by phone or email. You’ll get full access to the UK’s most detailed Credit Report, showing your complete information from Equifax, Experian, and TransUnion, along with support and insights from our professionally qualified Credit Analysts.

Updated 17 August 2021 by Sam Griffin

The UK's First Provider Of Online Credit Reports

Launched 25 Years, 35 Million Credit Scores & 8 Million Credit Reports Ago

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