Should homebuyers get a mortgage approval in principle before showings? – Market watch
The government wants house hunters to get a mortgage decision or agreement in principle (AIP) before they start viewing properties, as part of plans to improve the buying and selling process.
The Department of Housing said earlier this month it would continue to work with lenders, brokers and real estate agents to encourage buyers to obtain a DIP as early as possible in the home buying process.
We asked this week’s Marketwatch panel for their thoughts.
Principled decisions are the bane of life for buyers and other brokers.
Too often, as an advisor, a client will contact us and mention that they already have an AIP/DIP in place with another bank or broker.
However, this was often done weeks ago and due to the fast pace of the mortgage market and rate changes means that the PRA the client is offering is outdated and may no longer be the best option.
Most large estate agent chains that have in-house brokers will try to do an AIP so that the client feels ‘connected’ to them, so they will come back to them when they have found a property.
Personally, I think this is wrong, because the AIP is really only valid on that day as the most competitive for the client’s situation.
And the downside is that getting the left right and center of the AIP impacts the credit score of the customer.
We only AIP a customer early in the process if they have something in the background that is causing concern, for example, bad credit or missed payments, in order to give us and the customer confidence that a lender will accept them.
In my opinion AIPs are a selling tactic for some brokers and most clients these days are savvy enough to get advice on their upper buy limit before looking and unless there is something out of the ordinary, a client only needs an AIP at the time of application.
That’s what we’re doing right now and we’re getting very few rejections because of our thorough questioning and management of clients’ expectations and circumstances, which allows us to match them with the right lender the first time.
In my opinion, the government would be better off mandating some form of basic life insurance coverage rather than AIPs.
I strongly believe in getting an agreement in principle at the very first stage of the process. The benefit can be significant for both the advisor and the client.
This means customers understand their affordability from day one, we can manage expectations and agree a strategy to move forward on the maximum purchase price.
And when they discover it is a significant property, the client is confident they can bid knowing that an expert has reviewed their finances and agreed on their budgets.
In the early stages, all problems can be ironed out with lenders rejecting on criteria.
For an advisor, this allows them to keep control of their client.
In my case, I am also actively looking for the right decision for a property that they might like. That way I also stay in touch, just so they know I’m always around and have their best interests at heart.
There is less chance, after having the advice and the agreement that things can go wrong.
It is certainly more advantageous for the real estate agents, because they can be sure that the sale of the house will progress.
I had a situation recently where a first time buyer didn’t get advice but offered on a property.
Her budget and what she could afford were way off.
She thought that just because she could afford the payment, the lender would give her the money.
The result is that a disappointed customer walks away… That’s why getting advice and agreement is imperative in the buying process.
I have always been cautious about obtaining an AIP/DIP before finding a property, and often advise clients that an AIP from a lender we may not ultimately approach for your mortgage may not be worth it.
Since there is no specific loan to value, it is difficult to see how affordability is tested if loan size and loan to value are unknown.
Questions that remain unclear could include, should the client require their pension contributions to be ignored or will you have to use net profit or dividends and salary if the plaintiffs are self-employed?
There is also no benefit in continuing to have customers credit rated, which will ultimately lead to a more negative score.
Indeed, there are those who “forget” to inform you that they had “forgotten” to pay the credit – for those who are not too sure there are the credit reference agencies, some of which are free.
The last concern, which has just been illustrated to me very well by a BDM, is quality control at lenders.
Low AIP rates relative to applications can cause lenders to question the quality of your business. So caution should be exercised if you use lenders to get a “credit report” but don’t follow it up with submitted business.
For me, getting a fact found and supporting information is normally enough to be able to give the client the confidence they are looking for at the start of the home buying process and assuming they provide me with all the information appropriate, he is rarely disappointed.
I am always happy to provide a reference to the real estate agent, most of whom find this sufficient to be able to recommend the offer to their seller.