The ministry of housing earlier this month said it would continue to work with lenders, brokers and estate agents to encourage buyers to get a DIP as early as possible in the house buying process.
We asked this week’s Marketwatch panel what they think.
Decisions in principle are the bane of buyers’ and other brokers’ lives.
All too often as a adviser, we will have a client contact us and mention they already have an AIP/DIP in place with another bank or broker.
However, these were often done weeks ago and due to the fast pace of the mortgage market and rate changes, it means the AIP the client is waving around is out of date and may now not be the best option.
Most of the big estate agent chains who have brokers in-house will try to get a AIP done in order to make the client feel ‘tied’ into them, so they come back to them when they have found a property.
Personally I feel that’s wrong, as the AIP is only really valid on that day as the most competitive for the client’s situation.
And the downside is that getting AIP’s left right and centre impacts on the client’s credit score.
We only AIP a client at the start of the process if they have something in the background that gives cause for concern, for example, bad credit or missed payments, in order to give us and the client confidence that a lender will accept them.
AIPs in my view are a sales tactic for some brokers and most clients these days are savvy enough to get advice on their upper buying limit before looking and, unless there is something out of the ordinary, a client only needs a AIP at the point of application.
This is what we do at the moment and we get very few declines due to our thorough questioning and managing of client expectations and their situation, which allows us to marry them unto the right lender first time round.
In my view, the government would be better making some form of basic life cover compulsory rather than AIPs.
I’m a strong believer in getting an agreement in principle at the very earliest stage in the process. The benefit can be great for both the adviser and the client.
It means the clients understand from day one, their affordability, we can manage the expectation and agree a strategy moving forward on the maximum purchase price.
And when they find that all important property, the client is confident they can offer knowing that an expert has looked at their finances and agreed their budgets.
At the early stages, any issues can be ironed out with lenders rejecting on criteria.
For an adviser, it helps keep control of your client.
In my case, I also actively look on right move for a property they may like. This way, I also keep in contact, just so they know I’m still there and have their best interests at heart.
There is less chance, after having the advice and agreement that things can go wrong.
It certainly is more beneficial for the estate agents as well, as they can be confident that the house sale will progress.
I had a situation recently where a first-time buyer hadn’t had advice but offered on a property.
Her budget and what she could afford were way off.
She thought just because she could afford the payment, then the lender would give her the money.
The result is one disappointed clients walks away… That’s why getting advice and an agreement is imperative to the buying process.
I have always been cautious about obtaining an AIP/DIP prior to finding a property, and often advise clients that an AIP from a lender that we may not finally approach for your mortgage is perhaps not worthwhile.
Given there is no specific loan to value it is difficult to see how affordability is tested if the loan size and loan to value is unknown.
Questions that remain unclear could include, whether the client requires his pension contributions to be ignored or will you be needing to use net profit or dividends and salary if the applicants are self-employed?
It is also not advantageous to keep having the clients credit scored, which will ultimately lead to a more negative score.
Indeed, there are those that “forget” to inform you that they had “forgotten” to pay credit – for those that are not too sure there are the credit referencing agencies, some of which are free to use.
The final concern, that has just been very well illustrated to me by a BDM, is the quality control at lenders.
Low AIP to application rates may cause lenders to question the quality of your business, so caution should be used if you do use lenders to obtain a “credit report” but do not follow it up with submitted business.
For me, obtaining a fact find and the supporting information is normally enough to be able to give the client the confidence they are looking for when beginning the house buying process and assuming they furnish me with all the appropriate information they are rarely disappointed.
I am always happy to provide a reference to the estate agent most of which find this to be sufficient to be able to recommend the offer to their vendor.