Mortgage Declined After Agreement in Principle? Discover Why & Next Steps

Securing a mortgage can be an overwhelming process, and when you receive an Agreement in Principle (AIP), it feels like a significant step forward. An AIP gives many UK homebuyers confidence that their mortgage application is likely to be approved.

However, it’s important to understand that an AIP isn’t a full guarantee. Unfortunately, there are instances where a mortgage is declined after this initial agreement, leading to disappointment and uncertainty. But if you find yourself in this situation, you’re not alone, and there are practical steps you can take to recover and move forward.

In this guide, we’ll explore why your mortgage might be declined even after receiving an AIP, what rights you have as a borrower under UK law, and, most importantly, how you can bounce back from this financial setback.

The article is updated as of Sept 18, 2024

What Exactly is an Agreement in Principle?

An Agreement in Principle (AIP), sometimes referred to as a Mortgage in Principle or Decision in PrincipleA preliminary decision by a lender to offer a mortgage, base... (DIP), is a provisional indication from a lender that they are willing to lend you a specific amount of money. This agreement is based on a basic overview of your financial situation, including your credit history, income, and debts. An AIP helps to give you and the seller confidence that you can secure a mortgage, which can make it easier to put in an offer on a property.

However, while an AIP shows that you’re on the right track, it is not binding. It’s only after a full mortgage application, including more rigorous checks, that a final decision will be made.

Why a Mortgage Might Be Declined After an Agreement in Principle

Although an AIP is an encouraging first step, there are several reasons why a full mortgage application might be turned down. Here are the most common reasons why this happens:

1. Deeper Credit CheckA check of a borrower's credit history, which is used by mor... Problems

While an AIP typically involves a soft credit check, the full application requires a hard credit search. This deeper dive can reveal issues like late payments, County Court Judgements (CCJs), or defaultsMissed payments on credit accounts, which can affect a borro... that weren’t visible during the AIP process. Such discoveries can make a lender reconsider their offer.

2. Changes in Your Financial Situation

Lenders rely on your financial stability when approving a mortgage. If your circumstances change between receiving the AIP and submitting the full application, such as a drop in income, new debt, or job loss, lenders may see this as a risk. A sudden shift in your financial health can lead to a mortgage decline, even if you have an AIP in place.

3. Discrepancies in Your Application

An AIP is based on the information you provide to the lender. If there are inconsistencies between what you initially disclosed and what is uncovered during the full application process, this could trigger a decline. For instance, underestimating your existing debt or overstating your income can result in your application being rejected.

4. Property-Related Concerns

Sometimes, it’s not your financial status but the property itself that leads to a mortgage decline. If the property you intend to buy has structural issues or is deemed unsuitable for lending (such as a non-standard construction), lenders may back out, even after issuing an AIP. Lenders want assurance that if they need to repossess the property, it can be resold without major difficulties.

5. Affordability Stress Tests

Lenders are legally required to ensure you can comfortably afford your mortgage repayments, even if interest rates rise. If your income-to-debt ratio is too high, or if affordability tests suggest that you could struggle to make repayments in the future, lenders may decide it’s too risky to approve the mortgage.

6. Employment Stability

Job stability is a key consideration for mortgage lenders. If you’ve recently changed jobs, become self-employed, or your employment status has shifted in any way since obtaining your AIP, the lender might be less confident in your ability to make steady repayments. Self-employed applicants, in particular, face more scrutiny if they have less than two years of income history.

How UK Regulations Protect Mortgage Applicants

In the UK, mortgage lenders are regulated by the Financial Conduct Authority (FCA). These regulations ensure that lenders carry out proper affordability checks and treat customers fairly. Under UK law, lenders must give you a clear reason for declining your mortgage application. While they might not provide detailed specifics, they must at least outline the area of concern—whether it’s your credit score, income, or property valuation.

The Mortgage Market Review (MMR), which was implemented in 2014, introduced stricter regulations around mortgage lending, ensuring that only those who can genuinely afford a mortgage are approved. As a result, lenders now have to be more cautious about lending, especially when there is any doubt about your financial stability or the long-term affordability of your mortgage.

Steps to Take If Your Mortgage is Declined After an AIP

Being declined after an AIP can feel like a setback, but it’s important not to lose hope. There are several actions you can take to address the issues and improve your chances of getting a mortgage in the future.

1. Understand Why You Were Declined

The first step is to request feedback from the lender. Once you know why the mortgage was declined, you’ll be in a better position to resolve the problem. Whether it’s your credit score, affordability, or an issue with the property, understanding the reason will guide your next steps.

2. Check Your Credit Report

If your mortgage was declined due to a credit issue, get a copy of your credit report from agencies like Experian, Equifax, or TransUnion. Look for any errors, unpaid debts, or signs of financial mismanagement. If there’s anything you can fix, such as settling outstanding balances or correcting inaccuracies, take action immediately.

3. Improve Your Affordability

If your lender concluded that you couldn’t comfortably afford the mortgage, consider ways to improve your financial situation. This might involve paying off debts, reducing monthly outgoings, or saving for a larger deposit. You might also need to look for a property within a lower price range.

4. Seek Professional Guidance

A mortgage broker can help you navigate the complexities of a mortgage application and find a lender who is more suited to your specific circumstances. Brokers often have access to lenders and products that are not available to the general public, which could be crucial if your financial situation is unusual or complicated.

5. Explore Specialist Lenders

If traditional lenders have turned you down, you might consider working with specialist lenders who offer products designed for people with bad credit or non-standard income. While these mortgages may come with higher interest rates, they can provide a path to homeownership for those who don’t meet standard criteria.

6. Wait and Reapply

Sometimes the best option is to wait. If your decline was due to temporary factors, such as recent job changes or new debt, giving it a few months before reapplying can strengthen your application. In the meantime, focus on improving your financial position.

We suggest you contact a mortgage broker to help you with the application process.

FAQs

What does an Agreement in Principle mean for my mortgage application?

An Agreement in Principle (AIP) is a conditional offer from a lender indicating that they are likely to lend you a specified amount based on an initial assessment of your finances. However, it’s not a guarantee, and further checks are required before a full mortgage offer can be made.

Why was my mortgage declined after getting an Agreement in Principle?

Your mortgage may be declined due to issues uncovered during the full application process, such as problems with your credit report, changes in your financial circumstances, or concerns about the property you’re buying.

Will a mortgage rejection affect my credit score?

A declined mortgage application can negatively impact your credit score, particularly if multiple hard searches are conducted. It’s important to avoid applying to multiple lenders in quick succession after a rejection.

Can I appeal a declined mortgage decision?

While you can’t formally appeal a mortgage decline, you can request feedback and take steps to address the issues before reapplying, either with the same lender or a different one.

Should I apply for another AIP after being declined?

It’s best to resolve the issue that led to your mortgage decline before applying for another AIP. Reapplying too soon could further damage your credit score and reduce your chances of success.

Can I still buy a house if my mortgage is declined?

Yes, being declined for a mortgage doesn’t mean you won’t ever be able to buy a house. Address the reasons for the decline, improve your financial situation, and consider alternative mortgage products or lenders.

Conclusion

While it’s frustrating to have your mortgage declined after receiving an Agreement in Principle, it’s not an uncommon issue, and there are solutions. By understanding the reasons for the decline and taking practical steps to rectify any problems, you can improve your chances of securing a mortgage. Whether it’s improving your credit score, adjusting your financial situation, or exploring specialist lenders, there are ways to overcome this hurdle and continue on your path to homeownership.