A low documentation loan is a loan that requires less documentation and considers other factors such as credit scores and consistent income. A borrower may not have the documentations required while applying for a normal loan but having a good credit score can make them eligible for this type of loan. Borrowers who have been employed for more than one year in the same job can also be eligible for this loan. If you earn more than 20% of your monthly reimbursements, you are likely to get approved for this loan as well, as long as you can prove that you are in a position to make repayments without fail.
Application Process of a Home Loan
As time goes by, it is proving harder to get approved for a loan especially if you do not have the necessary requirements and documentations, a low doc loan comes in handy. While applying for a home loan, you will be required to use the property either new or an existing one as collateral on the loan. A guarantor who can provide proof of a regular income for the past three years is also a part of this process. The lender will enquire about your financial status and verification of the provided information so as to fulfil the NCCP act of 2009. They will assess your capability to reimburse the loan by verifying your income and affordability of the loan.
For self-employed borrowers, lenders may ask for the following as proof of income:
Proof of business registration: The lender will ask for your business registration certificate and Australian Business Number because the income your business makes will determine the amount of loan, they will give you.
- Business statements: Most lenders will ask you to provide statements for the past 12 months as proof of whether or not you are able to pay loan
- Business bank statements: A lender will ask you to provide business transactions for the past six months depending on the lender you chose.
- Accountant’s letter: The lender will also ask for an income form which has been signed by your accountant.
- Tax returns: Lenders will want to see your tax documents and your return history.
- Income declaration: Since you do have pay slips, you will be required to sign a confirmation statement to prove that you earn the amount stated to acquire the loan.
Advantages of a low doc loan
- It offers other alternatives as proof of income other than tax returns
- They are easier to apply and get approves because they don’t require a lot of documentations
- They enable borrowers who do not have the necessary documents acquire a home loan
Disadvantages
- They have a higher rate as compared to normal loans
- They have strict terms and conditions like a large sum of deposit
- They have extra fees like risk fees
- Not all financial institutions offer low doc loans
Lenders That Offer Low Doc Home Loans.
Banks, private institutions and credit unions are amongst lenders that offer low doc home loans. Each of them has a different eligibility and loaning standards and interest rate charges. Discussed below are some of these lenders:
- ANZ bank: It has a program known as the ANZ low doc home loan that allows clients to select from variable and fixed rate home loans and use options such as redraw and offset accounts.
- St. George: St. George offers home loans with fixed rate, variable rate and home equity loans. You can choose offset accounts or fixed rates for a maximum of five years with full interest.
- Adelaide and Bendigo bank: Bendigo and Adelaide bank offers a wide range of loans which include low doc home loans, variable rate and fixed rate home loans.
- Westpac bank: Westpac bank has a Rocket Repayment Home Loan which provides variable rate low doc home loans, investment loans and line of credit loans which come with fee and interest rate discounts.
- Commonwealth Bank: Commonwealth banks has a variety of low doc home loans such as line of credit loans, basic and standard variable rate home loans and fixed rate home loans.
- RAMS: This is a private institution that has three main types of low doc home loans namely: fixed and variable rate home loans that allow redraw and rate discounts, and a line of credit loan for equity.
- Pepper: Pepper has home loans for self-employed individuals who have poor credit score.
Comparison Of A Low Doc Home Loan And A Regular Home Loan
Low doc home loans have a higher interest rate as compared to a normal loan because the lender must compensate themselves for the risk of loaning you without the proper documentations.
Low doc home loans don’t require a lot of qualifications such as financial reports that are compulsory in regular home loan. The lender will require the income declaration and proof of affordability to determine your eligibility for the loan.
A low doc home loan allows you to borrow a maximum of 80% of your loan to value ratio but some lenders may offer 90%
Who Can Apply For A Low Doc Home Loan?
A low doc home loan is a life saver for business owners who are unable to produce proof of income using the regular methods. Eligibility varies from one lender to the other but producing an ABN and the documents sated above is common to all of them. Having an excellent credit score and assuring the lender that you can be able to make repayments on time will guarantee a successful approval. People who can apply for a home loan are:
1. Contractors
Contract workers can apply for this loan because they have irregular income throughout the year. Their income comes in divisions and they might be unable to produce consistent pay slips.
2. Investors
Investors may also have irregular income and employment history since they are dependent on investment income. An investor is required to prove that the income they put down while applying is big enough to service the loan, given that the monthly rental income is exclude on the business activities statements. Investors can apply for a low doc home loan to finance their incoming investments.
3. Self-employed citizens
Self-employed Australians can apply for this type of loan provided they know how much they make over the year and how much they spare in order to make frequent loan reimbursements. You can also apply for this loan if your business has irregular income as long as you have been running the business in regard to the relevant tax laws.
How Large Of A Deposit Do I Need To Apply For A Low Doc Home Loan?
Since a low doc home loan holds high risks to the lender, they will demand for a minimum of 20% deposit, because it is quite impossible to carry off more than 80% of your property’s worth. With a LVR of 90- 95% and a 20% deposit, you can be assured of approval. In case you have a LVR of less than 60%, the lender will consider other factors such as, business registration of more than 1 year to prove your professionalism. Some lenders may ask for a larger than 20% deposit and an excellent credit score. This is an advantage to them because they are minimizing the risks that come with a low doc home loan
Conclusion
Lenders differ from one to the other and it is advisable to go through the eligibility criteria before applying for a loan. Involving a professional with experience on low doc home loans is highly recommended to ease the procedure. You can apply for a low doc home if you have no income history, provided you show the necessary documents. Work on your credit score to increase your chances of loan approval. A low doc loan gives you the freedom to negotiate for a better rate. We hope this article has enlightened you about a low doc home loan and will help you through the application process.
FAQs
1. What proof of income does a lender as for?
If you have irregular income, the lender will ask you for to present tax returns documents and self-verified income declaration form signed by your accountant.
2. What is the difference between a low doc and no doc home loan?
A low doc home loan needs proof of income such as bank statements whereas a no doc home loan is a loan where you present a signed declaration that states your affordability status.
3. Why should I involve a professional in the application process?
It is advisable to involve a mortgage broker because they have experience in this field. They have access to different lenders and they have knowledge of the lending criteria of each of them enabling you to save some money and time.
4. Can I switch from a low doc home loan to a full doc home loan?
Yes. You can easily upgrade to a full doc loan by proving responsible and ability to make repayments on time within a span of two years. However, the lender charges a small fee and will require income verification in case you do not have the 2 years of excellent conduct.
5. What does an income declaration form mean?
This is a form a borrower presents to the lender as proof of income to justify affordability.