The Truth About Low Doc
When Are Low Doc Loans Appropriate?
Some entrepreneurs have concerns and get a little frustrated when it comes to applying for a standard self employed home loan.
That’s because of the stringent documentation requirements set forth by most lenders.
These documents require proof of income, and can include pay slips, Group Certificates and for self employed applicant’s tax returns from the Australian Tax office as well as full financial reports for companies.
Self-employed people in the past faced greater obstacles when obtaining financing through a standard self employed loan.
This is because banks customarily prefer to lend to borrowers with verifiable sources of income such as PAYG employees.
Traditional loans place significant importance on income and financial documentation, locking out those self-employed people who cannot provide them.
These days however low doc home loans are the best recourse for these applicants.
Who Does The Low Doc Loan
Market Cater To?
Many running their own business for one reason or another are not be able to provide documents to prove their income, assets, and liabilities, as thoroughly as an employed person.
However, recently lenders have made efforts to reach out to this disadvantaged segment of the population.
This is in realization of the opportunities of serving this large market.
This has been done through specially designed low doc loans, which cater to those who cannot provide sufficient paperwork for a standard loan.
It will be especially beneficial to those self employed individuals who do not possess financial or tax records.
The major difference between standard loans and low doc home loans is the level of documentation required for loan approval.
Borrowers in most instances receive the benefits of a traditional loan when they apply for low doc loans.
They are available through bank and non-bank financial institutions.
Standard requirements for a conventional
low doc home loan
A standard low doc home loan will require several documents that act as verification of both income and tax status. They include:
- A clear credit history is required, although some lenders will allow up to two paid Telco type defaults that are under $500
- A signed income declaration by the borrower
- Rental statements or Rental Appraisal letter confirming any rental income
- Some lenders will require an accountant’s letter confirming ability to repay the loan
- An Australian Business Number registered for a minimum of 12 months, or 24 months in most instances
- Business Activity Statements (BAS) for the last 12 months
- Australian Tax Office Portals to confirm the BAS payments have been paid
- 3 months bank trading statements
- Copy of the Contract of Sale if purchasing a property
- Copies of normal identification documents such as a Drivers Licence and Passport
- If refinancing any debts copies of statements, latest 6 months for mortgages and latest 3 months for personal loans or credit card debt
How Much Can I Borrow?
Lenders will require different amounts of paperwork depending on the risk profile of the loan applicant.
Higher risk applicants will be required to provide more paperwork as part of the due diligence process.
Most low doc loan lenders will customarily offer financing for up to 80% of the property value.
This has however been reduced to a maximum of 60% for some lenders.
This is in the after math of the global financial crisis, which saw a raft of regulations that tightened credit for most borrowers.
Despite this, 80% financing is still available through low doc loans lenders.
More About Document Requirements
For Low Doc Home Loans
Low doc loans have less stringent requirements as far as income and financial statements are concerned.
A financing level of 60% of the property value will typically need only an accountant’s letter.
This is to confirm the ability of the applicant to repay the loan.
Once the loan to value ratio (LVR) approaches the 80% level, lenders will demand extra documentation.
This will include 3-6 months bank trading statements and Business Activity Statements for the last 12 months.
Providing extra information when it is required is still advantageous compared to those of a standard home loan.
Mainly because when applying for a standard full doc self employed home loan you are required to provide full documentation including company tax returns with full financial reports and personal tax returns to obtain the loan.
Where Self Employed Applicants
Can Fall Short
Because of tax minimization the taxable income that is often shown in these tax returns is never enough to cover the loan amount.
For this reason, most low doc home loan lenders treat 40% of the gross annual turnover of the business as the allowable income.
This gives the applicant more leeway to borrow much more than is possible with a standard home loan.
Low doc loans are generally mortgage backed. Most lenders will require mortgage insurance for financing levels of more than 60%.
However, some lenders will willingly absorb this additional cost.
Most lenders will also demand an ownership of more than 20% in the property as condition for financing.
Other lenders may require a much higher ownership level than this.
Is Credit history Important?
Low doc loan lenders place a greater emphasis on the applicant’s credit history than with a regular self employed loan.
The borrower will therefore be required to prove that they have a clear credit history.
This is a way of reducing the credit risk of low doc loans, which are classified as a riskier type of lending.
This is because the loans are extended to persons with less predictable or guaranteed income sources.
Applicants with a clear credit history can now access low doc home loans at normal rates of interest, as long as they do not have a poor credit history.
However those with impaired credit histories are not entirely locked out by low doc lenders.
This is because specialised low doc loans are available for this category of borrower.
Nonetheless they will have to pay higher rates of interest to compensate for the increased credit risk.
The Versatility Of
Low Doc Loans
Despite the less stringent rules, low doc home loans are just as useful as any standard loan.
Easier application procedures and higher loan approval rates do not diminish the importance of these types of loans.
They can be used by both individuals and businesses to finance;
- commercial or residential property transfers and purchases.
- home renovations
- purchase investment property (residential or commercial)
- Cash out for any worthwhile purpose
Low doc home loans can be relied upon to provide critical financing without the hassles of lengthy paperwork.
Their higher approval rate is also more preferable to the ambiguous loan approval procedures of standard home loans.
Low Doc Loan Restrictions
The Global Financial Crisis (GFC) forced many banks to tighten low doc loan application requirements and no doc loans have been completely done away with.
Many of them now require applicants to provide BAS statements as proof of income. These loans are not necessarily true low doc home loans as they once were.
Previously many low doc loan lenders only required the borrower to sign an income declaration to confirm their income.
Nowadays they are midway between standard loans and low doc loans. Very few lenders now offer a low doc home loan without requiring BAS documents.
Low doc home loans are an important asset when it comes to quick and guaranteed financing for individuals and small businesses.
They may be the only option for self-employed persons and contractors who don’t have the required documentation to meet standard self employed home loan application policies.
Don’t Get In Over Your Head
Furthermore, low doc loan borrowers who may have suffered some kind of penalty when originally applying for their loan can have their loans re-assessed after an appropriate time period.
If they can provide income and tax documentation later on and have a track record of good conduct on their loan they can usually have their situation re-assessed.
This is by way of having the low doc loan converted into a standard loan after reassessment, whereby they could enjoy a lower cost of borrowing.
Low doc loans allow people to borrow money for worthwhile purposes like purchasing property that may otherwise not be possible.
When using lo doc loans remember to borrow within your practical budgetary financial limits, don’t get in over your head.