4th October 2024

The importance of a Decision in Principle

Applying for a mortgage is quite a robust process that incorporates several key stages. One of the more important parts of securing a mortgage is obtaining a Decision in Principle (DIP), which is a way to signify that a lender is willing to offer you funding. Understanding how a Decision in Principle works, as well as the benefits it provides and how to obtain it, can really help your journey towards home ownership. So, in this article, we'll discuss the importance of a Decision in Principle and cover all you need to know about this nuanced part of the mortgage process.

What is a Decision in Principle?

A Decision in Principle is a statement from a lender indicating that they would be willing to lend a certain amount to you based on preliminary information about your income, debts, and credit score. It is not a guarantee of a loan, but it serves as a provisional acceptance pending further verification of details provided by the applicant.

Obtaining a DIP is often the first serious step toward buying a home. It provides a solid foundation for your application in a few different ways, such as:

• Confidence for the Buyer: It gives you an idea of how much money you can borrow, which helps in setting realistic expectations when searching for a property.
• Credibility with Sellers: Having a DIP can make you a more attractive buyer to sellers because it implies financial readiness and seriousness about the purchase.
• Speeds Up the Process: With a DIP, the mortgage application process can proceed quicker once a property is chosen, as the lender has already assessed your financial background.

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Benefits of Obtaining a Decision in Principle

Securing a DIP isn't a legal requirement to obtain a mortgage, but there are plenty of reasons why it benefits you to have one. Below is a breakdown of the benefits associated with obtaining a DIP for your mortgage:

Enhanced Planning and Budgeting

The primary benefit of obtaining a DIP is the ability to plan and budget effectively. Knowing your potential borrowing limit helps in filtering out properties that are either below or above your financial reach, focusing your search on suitable homes and saving time.

Strengthening Buyer Position

In competitive housing markets, a DIP can place you a step ahead of other buyers who may not have similar proof of their borrowing capabilities. This can be particularly useful in seller's markets, where multiple offers are common. Sellers are more likely to consider offers from buyers who have demonstrated financial due diligence.

Reduced Uncertainty

The home-buying process is fraught with uncertainties, which can be stressful. A DIP reduces one of the biggest uncertainties - financing. By securing a DIP, you gain peace of mind about your mortgage prospects, allowing you to move forward with more confidence.

How to Obtain a Decision in Principle

Now that we've covered the significance of a DIP, let's learn how you can obtain one. The process is quite standardised, so it shouldn't come with any surprises or major challenges on your end. You will need to fill out an application with a lender, which is typically done online or in person. It typically includes a soft credit check that won't impact your credit score. Once you have your DIP, it is generally valid for a limited period between 30 and 90 days.

Alongside your application, to obtain a DIP you will need to provide a few key pieces of information. This will include:

• Personal Information: Full name, date of birth, current address, and past addresses.
• Income Details: Salary, bonuses, other income sources.
• Debt and Expenses: Current debts, monthly expenses, and other financial obligations.

Considerations and Limitations of a Decision in Principle

While a DIP provides many advantages, it does have a few limitations and things that you'll need to consider. For starters, a DIP is not a loan guarantee and it doesn't mean that a mortgage has been approved. Your mortgage application will be subject to a detailed verification alongside a full credit check, so be mindful of this. It is also time-bound, so if you experience any delays in your application and it pushes your DIP beyond its validity period, you may have to reapply.

Finally, it's worth mentioning that if you apply for multiple DIPs in a short period, it could negatively impact your credit score if the lender performs a hard credit check. These considerations aren't suggesting that you shouldn't get a DIP, but you should be mindful of these issues.

Make Securing a Mortgage Easier With a Decision in Principle

A Decision in Principle is a useful tool for anyone looking to buy a home through a mortgage. It enhances the buyer's credibility, helps in planning and budgeting, and reduces the uncertainties associated with home buying. By understanding how to obtain and effectively use a DIP, prospective homeowners can position themselves for a smoother and more assured path to securing their future home.

If you have any questions about securing a Decision in Principle or would like advice for securing a mortgage, then let our team at WIS Mortgages help. Contact us today for further assistance or guidance.

As a mortgage is secured against your home it may be repossessed if you do not keep up the mortgage repayments.

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Frequently Asked Questions

Q. What is the purpose of a Decision in Principle?

A. A Decision in Principle (DIP) is used to confirm that a mortgage lender is willing to lend you financing for a mortgage. It is also sometimes known as an agreement in principle and is a way to outline provisional acceptance of a mortgage application.

Q. Does a Decision in Principle affect credit score?

A. No, a Decision in principle should not affect your credit score. This process only applies a soft credit check, which won't directly impact your credit rating. When you apply for a mortgage outright, the process uses a full credit check which could impact your credit score.

Q. Can a mortgage be declined after a Decision in Principle?

A. Although a Decision in Principle is a great foundation for a mortgage application, it isn't a guarantee. As it is only a provisional acceptance of financing, a lender has the legal right to decline a mortgage even after granting a Decision in Principle.

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