What Is Approval In Principle (AIP)?

What is Approval In Principle (AIP)?

It’s one of the initial steps in securing a mortgage and gives you an indication of how much a lender is willing to loan you, based on your financial circumstances. While it’s not a guarantee, it gives homebuyers a sense of confidence before making an offer on a property.

When you apply for AIP, the lender performs a preliminary assessment of your finances, reviewing your income, expenses, and credit history to determine if you meet their lending criteria. Unlike a formal loan approval, AIP doesn’t lock you into a contract, but it does show that a lender is likely to approve your home loan—pending a few conditions.

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What Does AIP Involve?

• Income verification: How much you earn and how stable your income is.
• Assets and liabilities: What you own and what debts you currently have.
• Credit history: A review of your credit file to check for any issues.
• Living expenses: How much you spend each month on essential and non-essential items. Identity verification: Proof of who you are and that you meet the lender's residency or visa requirements.

An AIP is generally valid for 90 days, up to 120 days with some lenders, which gives you a few months to find the right property. Once you find a suitable home, you can move forward with the full loan application process.

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Does Approval In Principle Mean You’re Fully Approved?

Approval in Principle is a conditional form of pre-approval. While it shows that a lender is likely to approve your loan, it doesn’t guarantee you’ll get the full approval until a few more steps are completed.

Many lenders use software to process AIP applications, which means they can issue these approvals relatively quickly. However, the AIP will often come with conditions that must be met before full approval is granted. These conditions typically include:

• Manual assessment of financials and credit file: A deeper dive into your financial documents to ensure everything is accurate and aligns with lending policies.
• Suitability of the property: The property you’re purchasing needs to meet the lender’s criteria. Certain properties, like heritage homes or those in remote areas, may not be eligible.
• Property valuation: A professional valuation to ensure you’re not paying more than the property is worth.

In other words, while AIP gives you a significant level of confidence to move forward with your property search, the loan isn’t fully secured until these conditions are met. However, it’s an important part of getting pre-approval for a home loan because it shows that you’ve passed an initial check, and the lender is likely to work with you.

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What Happens After You Sign A Contract?

Once you’ve secured a property and signed a purchase agreement, the next steps are critical. If you’ve already obtained Approval in Principle, you can contact your lender and let them know that you’ve found a home.

The lender will then shift your AIP to a formal loan application and order a valuation of the property. Because you’ve already completed most of the legwork (such as gathering payslips, verifying your ID, and submitting financial documents), this speeds up the approval process.

Here’s how it works:

• Lender’s full assessment: The lender will recheck all your documents, ensuring everything is up to date and in order.
• Property valuation: A third-party valuer will assess the property to ensure it’s worth the price you’ve agreed to pay.
• Loan conditions: If everything checks out, the lender will issue a formal loan approval, allowing you to move forward with the settlement.

By going through the AIP process early on, you reduce the stress of scrambling for approval during the contract stage. It also lowers the chances of needing to extend the finance date or, worse, proceeding without secured finance.

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Are You Locked In With The Lender?

One of the best things about Approval in Principle is that it doesn’t lock you into a commitment with a specific lender. You’re free to switch lenders even after obtaining AIP if another option better suits your needs. However, be cautious about applying for AIP with multiple lenders in quick succession. Each inquiry is recorded on your credit file, which could raise red flags with future lenders.

Since AIP is valid for 90 days, sometimes up to 120 days with some lenders, there’s a chance that your approval may expire before you find the right property. Additionally, lenders can change their interest rates or loan features during that period, which might prompt you to switch lenders or start the process again.

Ultimately, AIP gives you the flexibility and confidence to start property hunting, without committing to a loan until you’re ready.

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AIP Frequently Asked Questions

How do I get pre-approval for a home loan?

To get pre-approval for a home loan, you’ll need to provide details about your income, expenses, assets, and liabilities to a lender. They will then assess your financial situation and determine how much they’re willing to lend.

Does pre-approval guarantee I’ll get a loan?

No, pre-approval doesn’t guarantee a loan. It’s an initial assessment that provides an estimate of how much you can borrow, but full approval depends on meeting certain conditions.

How long does Approval in Principle last?

AIP typically lasts 90 days, and up to 120 days with some lenders. After that, you will need to reapply if you haven’t found a property yet.

Can I change lenders after getting AIP?

Yes, you’re not locked into a lender after getting Approval in Principle. However, applying for AIP with multiple lenders too quickly could negatively impact your credit score.

What happens if the property valuation is lower than the purchase price?

If the valuation comes in lower than the purchase price, the lender may only offer a loan based on the lower amount, leaving you to cover the difference.

Why is getting Approval in Principle important?

Getting AIP provides you with peace of mind and allows you to confidently make an offer on a property, knowing that a lender is likely to approve your loan.

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Key Takeaways

If you’re serious about buying a home, getting pre-approval for a home loan should be one of your top priorities. Reach out to a mortgage broker or lender to start the process and give yourself a head start in the competitive property market.

Disclaimer: Unless otherwise specified, the opinions expressed in this article are strictly for general informational and entertainment purposes only and should not be taken as financial advice or recommendation. Views are subject to change without notice at any time.