Low-documentation or low-doc loans are for people - generally the self-employed - who have difficulty getting the documentation together that is required to get a traditional home loan.
Low-doc loans differ from another relatively new loan in the marketplace that is also gaining popularity - non-conforming loans. Low-doc loans have become very popular over the past few years and industry figures state they comprise around 10 per cent of all mortgage loans written.
Traditionally, the interest rate offered on these types of loans was higher than for the standard variable rate but recently they tend to be offered at similar rates. While lenders have various methods of establishing whether they will lend someone money, there are some major differences between mainstream and low-doc loans.
Borrowers wishing to obtain a low-doc loan will normally need to satisfy three requirements:
These types of loans are normally offered as a way of meeting the requirements of small business owners, freelancers and other people who hold an ABN. They are designed for self-employed people who otherwise wouldn't be able to get a home loan due to their inability to show how much they earn using traditional methods. Generally, the eligibility requirements from lender to lender will differ, but in most cases you'll be required to have an ABN and be able to supply the documents listed in the section above. In most cases you'll need to still have a good credit history, and your lender will want to know that you can afford repayments. Generally, low doc home loans might suit the following borrowers:
If you are self-employed you know how much you earn over the course of the year and you know how much spare cash you have in your budget each month to dedicate to your home loan repayment. However, if you have only been in business for a few years or your income appears inconsistent because you run your business to be tax effective instead of to turn over high profits on paper, then you can benefit from self-certifying that you are able to service a loan.
As an investor you may not have a regular income or employment history if you rely on your investment income. However, if you are in the market for a new investment property then you can use a low doc loan to help make your next investment a reality. If you are an investor looking at applying for a low doc loan also keep in mind that the rent you receive from your investment properties is not included on your BAS turnover so you will need to make sure the income you are assessed by is high enough.
In a similar situation to self-employed Australians, contract workers may work for a portion of each year and then spread their income out over the year. Because of this more irregular income source, if you're a contract worker you may have to seek a low doc home loan.
Lenders by law must fulfil the National Consumer Credit Protection Act (NCCP) of 2009 by making sure that they make reasonable enquiries about your financial situation and verify the information you provide. This means they'll verify your ability to repay the loan using a combination of your declared income and your declared ability to afford the loan. When you're declaring your income and affordability, you'll need to supply the documents listed below.
While you don't have to show as much evidence you still need to complete the loan application process to be approved as a low doc borrower, and in many cases this will still require some documents. A low doc home loan application will require one or more of the following.