A “low-doc” home loan is one that’s issued to a borrower that does not want or is not able to provide the lender with proof of income. This situation makes most lenders consider low-doc loans to be high-risk. Proof of income is a key factor that lenders use in assessing the ability of a borrower to repay his or her loan. This does not mean that these loans are impossible to acquire, but the requirements imposed by the lender tend to be somewhat different. Here are some examples of typical requirements for a low-doc home loan:
Bad Credit – Nothing Doing
* Borrowers that come to lenders with poor credit histories are going to have an extremely hard time securing a low-doc loan. Loan approvals usually have a very low threshold for defaults on your credit history. They must be both few in number and small in volume. For most lenders a limit of no more than two defaults of less than $500 dollars is typical.
Equity or Deposit?
* You’ll need to provide increased security in the form of a greater amount of equity than with a conventional home loan. Standard equity requirements for a low-doc home loan are around 20 percent, although some lenders may require an even higher amount.
Do You Have an ABN?
* Low-doc home loan candidates will need to demonstrate that they’ve been through the process of registering for an ABN within a certain time frame.
How do You Verify Your Income?
* Without any form of proof of income, lenders will require you to fill out an income declaration form.
* Most lenders offering low-doc home loans look for risk mitigation in the form of a letter from an accountant which confirms your ability to repay the loan.
Show Bank Statements
* Many low-doc lenders will want to examine bank account statements showing your incoming cash flow as a form of income verification.
* Other lenders will want to verify your income by seeing business activity statements (BAS) from your ATO portal. Different lenders will base your borrowing capacity on different percentages of your total turnover, with 30 to 40 percent being a common level.
Lenders Mortgage Insurance
* Mortgage insurance is extremely common on low-doc home loans. Some lenders may offer to meet some of the costs of insuring your mortgage in this way.
Banks and Non-Conforming Lenders
* The lenders that handle most low-doc home loans are banks and non-conforming lenders.
Interest rates on low-doc home loans are generally higher across the board than those used on standard variable rate loans (but not always). Lately, some lenders have started to bring interest rates on low-doc loans and variable loans closer together. There are still significant differences in the ways the two types of loans work. Examples include:
No Documented Proof of Income
* Low-doc home loans, unlike standard loans, do not require proof of income or proof of tax returns.
Self Certification May be Accepted
* Some borrowers still use the self-certification process for low-doc home loans. This requires you to make a declaration confirming your ability to repay the loan. Today most lenders have additional requirements beyond this.
Exclusively for the Self Employed
* Low-doc home loans are typically used by those who are self-employed.
Investigate all of your financing options carefully before you apply for a low-doc home loan. Make sure you have picked out a financial product that meets your needs and a lender that will serve you reliably.
If you need help with all of this, seek out an experienced responsible mortgage broker.