It is very possible to get a mortgage agreement in principle and the have it declined by the mortgage lender afterwards. This is usually done when your circumstances have changed since you got a mortgage agreement in principle. If your mortgage is declined after having an agreement in principle then ask the lender why and check your credit history.
Can a mortgage be declined after agreement in principle?
Yes, when you get a mortgage agreement in principle the mortgage lender will inform you that they will reserve the right to decline your mortgage when you apply for a mortgage with them. So indeed, a mortgage agreement in principle can be given and then declined.
You could get a mortgage agreement in principle then get declined for a lot of reasons.
Are you applying for a different mortgage than your mortgage agreement in principle was?
Has your credit score changed since you got the mortgage in principle?
Has your mortgage agreement in principle expired?
Have you acquired new credit on your credit file since you got your mortgage in principle?
Getting declined after getting a mortgage agreement in principle is pretty common and could be for a variety of reasons but usually, it will be something on your credit file.
You should ask the mortgage lender why you were declined, you may get a response but typically they will simply refer you to the credit bureaus.
In either case, you should get your credit report from all three credit bureaus and check for anything on them that may damage your score.
Your mortgage lender may tell you which credit bureau they used so you can check with that specific credit bureau.
What does a mortgage lender check in an agreement on principle check?
When a mortgage lender does an agreement in principle check they will usually just check for the basics and give you an indication on if they may lend to you.
This check is in no way in depth and isn’t a guarantee that the mortgage lender will lend to you and for that reason, a lot of people who get a mortgage in principle may end up being declined when making a full mortgage application.
In a mortgage agreement in principle application the mortgage lender may check:
Your income is usually not verified at this stage but it is used in line with a multiple to see what you could probably afford. If the mortgage lender then checks your income when you make a full mortgage application and realises that it is less than you stated this may reduce your mortgage affordability and cause for you to be get a mortgage agreement in principle then have it declined.
The property value:
The mortgage lender will not check the property value but will rather take your word for it. If upon carrying out a property valuation they realise that the property is valued less than first assumed then this will reduce your mortgage affordability and likely see you get declined after getting a mortgage agreement in principle.
Your credit report:
The lender may do a soft credit search to see if you have not missed any payments recently, if you have been on the electoral roll and what your credit score is. They will not look into it in more detail.
They will look to see how often you changed addresses as a measure of your stability.
If you look unstable to the mortgage lender due to having way too many adresses then the mortgage lender may decline you after giving you a mortgage agreement in principle.
Your retirement age plan:
Mortgage lenders want to know that you will be working long enough to be able to repay the mortgage they are giving you. If you appear to old then it is very likely you will get declined at the mortgage agreement in principle stage and if not, then after.
Your disposable income:
Mortgage lenders will like to know you have enough disposable income to cover the mortgage and still be able to live comfortably every month.
The mortgage lenders criteria:
Mortgage lenders will want to know you meet their basic criteria in regards to the type of borrower you are, the type of property you are after, the amount of Loan to value(LTV) you are after and your basic credit record details.
What does a mortgage lender check in a mortgage application check?
A mortgage application is more in depth. This is because you will be paying for it and this shows you are ready to go forward. The check will be more exhaustive and in-depth than the previous mortgage agreement in principle check.
If you are declined for a mortgage application after having a mortgage agreement in principle then this could be due to the in-depth check which takes place which is incrediby different from the first check. A good mortgage broker will be able to set your expectations and let you know your chances of getting a mortgage with a particular lender before applying for the mortgage.
Mortgage applications will carry out a hard search on your credit file and if you get rejected this may temporarily reduce your credit score.
In a mortgage application the lender may check:
Anti-money laundering, fraud and sanction warnings:
The first thing most mortgage lenders will do is check to see if they can do any business with you by ensuring you are not listed on any watch list for anti-money laundering, fraud or a sanctions watchlist.
Credit history checks:
The mortgage lender will then check your credit history to ensure your in-depth credit behaviour is one that they will be happy with. This means they will check your repayment history if you have any county court judgements, any bankruptcies, any Individual voluntary agreements or payday loans on your credit file.
Most mortgage lenders will not lend to someone who has recently taken out a payday loan as it looks like bad credit behaviour. So try to avoid having a payday lender on your credit file at all if you can and if you have, try and ensure the payday loan account has been satisfied for at least 6 months.
When looking at your credit file, the mortgage lender will be looking out to see who you have a financial association with and if they have any red flags on them or have a poor credit history then this could affect your mortgage affordability.
Errors & discrepancies:
If you have too many errors or discrepancies on your credit file then the mortgage lender may think you are lying and decline your mortgage. Some mortgage lenders will ask you for clarifications before making a decision.
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. You should avoid making any credit inquiries in the 3 months up to when you intend to make your mortgage application as these may leave hard inquiries on your credit report which anyone can see. They may also temporarily reduce your credit score.
Some of the reasons why you may get a mortgage in principle but be declined for a mortgage include:
- Taking out new credit
- A change in income
- Negative financial associations
- Not meeting the lender’s criteria
- New missed payments or defaults on your credit file
- Lack of consistency on your mortgage application
Taking out new credit:
When you take out new credit this could increase your debt to income ratio, reduce your monthly disposable income and essentially reduce your mortgage affordability. Your mortgage broker will advise you not to make any new applications for credit as the hard searches carried out on your credit file could destroy your credit score.
Aside from this taking on new credit as well as repaying your mortgage might seem too much for you to handle and hence the mortgage lender will decline your mortgage application even though you have had a mortgage agreement in principle prior.
A change in income:
When your income changes it affects your mortgage affordability.
Most lenders work out how much they could lend to you using an income multiple.
If your income changes in the wrong direction, hence it falls then this means you could potentially be eligible to borrow less from this particular mortgage lender.
This isn’t the end of the road though as there will be many mortgage lenders who may offer an income multiple on your mortgage which covers the total amount you are looking to borrow to fund your home purchase.
It is very likely that you will get declined even after the mortgage lender has given you a mortgage agreement in principle.
Negative financial associations:
Negative financial associations can impact your affordability.
You may have a negative financial association if anybody was a cosigner on an account you had a or a guarantor on an account or shared any financial account you may have had.
This persons negative credit file could potentially see you get a mortgage agreement in principle then see it declined by the mortgage lender when they do more detailed searches on your credit file.
Not meeting the lender’s criteria:
Not all mortgage agreements in principle are in-depth enough. This means some mortgage lenders will only do a very basic check and may not check if you are completely eligible for the mortgage product which they offer.
You will only realise that you are ineligible when you make a mortgage offer and are declined. Your mortgage broker may be able to differentiate which mortgage agreement in principle is as good as firm mortgage offer from the mortgage lender and which are worthless in context.
It could also be a simple change in your circumstance that makes you not meet the mortgage lenders criteria. E.g You could have applied for your mortgage agreement in principle whilst shopping for flats and indicated that you were after a mortgage for a flat.
If you then choose you want a mortgage for a house you may find that the mortgage lender no longer sees you a good fit to lend to as they may not lend on houses.
Subtle things like this could see you get a mortgage agreement in principle but then be declined.
New missed payments or defaults on your credit file:
If you miss any payments on your current credit agreements or default on any credit agreements between when you got a mortgage agreement in principle and when you applied for your mortgage you may find that your mortgage lender may decline your mortgage application.
Most mortgage lenders will not care if the default or missed payment was more than 6 months ago but if it within the last 6 months then they will take this into account and may not offer you a mortgage.
Missing new payments on your credit file coudl see you get a mortgage agreement in principle and then be declined.
Lack of consistency on your mortgage application:
If the information you filled on your mortgage agreement in principle form is different from the one you have filled when you apply for your mortgage application then the mortgage lender may decline your mortgage application even if they have given you a mortgage agreement in principle. This is because thye may find the errors or lack of consistency as a sign of someone who is lying.
In most cases, the mortgage lender will simply ask you for some clarification or to see if it was an error but if you have made multiple changes from your mortgage agreement in principle then it is likely the mortgage lender will not be receptive.
If your mortgage application has numerous errors which you cannot explain then rather than offer you a mortgage the mortgage lender may decline you even after offering you a mortgage agreement in principle.
Does an agreement in principle affect credit score?
An agreement in principle should not affect your credit score as most mortgage lenders will carry out an agreement in principle with a soft credit check which doesn’t leave any visible footprints to anyone but you. As you are the only one who can see the agreement in principle check it won’t affect your score.
You should inquire with the mortgage lender on if they will be doing a hard check or a soft credit check when issuing you an agreement in principle. In practice, you should avoid mortgage lenders who do a hard check for an agreement in principle but your mortgage broker will be able to assist you better.
After you get an agreement in principle you will now be taken more seriously by home sellers and real estate agents as it proves you have the ability to purchase the homes they are trying to sell.
A mortgage in principle isn’t a guarantee but it gives you an indication of hat a mortgage lender is willing to lend to you. You can now go and make further mortgage arrangements such as trying to find a conveyancer and applying for any first-time buyer government scheme such as the help to buy equity loan.
What happens if my mortgage application is rejected?
If your mortgage is rejected it will affect your credit score as it will be visible to others. Your credit score will likely go down but may bounce back in a few months. Getting rejected for a mortgage isn’t the end of the world.
There may have been many reasons why a mortgage lender may have rejected you. Your mortgage broker may be able to get a summary list from the mortgage lender detailing the reasons for their rejection.
You should avoid making any rash decisions such as applying for another mortgage without seeing why you were rejected for a mortgage in the first instance. A bad credit mortgage broker will be able to help you assess a specialist area of the mortgage market if the reason you were rejected was due to bad credit.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.