If you’re a contract worker or self-employed, you certainly have lots of perks, but when it comes to taking a home loan, furnishing your ‘income proof’ can be a headache. Lenders predominantly ask for financial statements because they want assurance that there’s a positive cashflow within the business.
The benefits of being self-employed is you can purchase your dream home through a low doc refinance home loans when your financials are not up to date. With the low doc loan approach, lenders will review your overall capability to service a loan based on certain levels of documents.
Here’s everything you need to know about low doc loans.
Lo Doc Home Loan: What Is It?
Low documentation loans are lending solutions for the self-employed. If you’re a freelancer, contractor or someone who doesn’t do regular jobs, and cannot produce evidence of income such as tax returns, financial statements or payslips, low doc loans can be very useful. investment Property
In these types of loans, a self-verification system is utilized where you have to state how much you earn with a document of declaration, majority of the time through an accountant’s letter, BAS or bank statements.
Low doc loan means that you’ll have to produce a lower number of documents in comparison to regular loans. Other than that, you’ll also have to meet certain requirements such as:
- You must be self-employed for at least 1 year and in some cases, 2 years.
- You can’t have a second mortgage on the property.
- Full property valuations
- The maximum borrowing capacity is 80% of the property’s purchase price. However, some lenders may lend up to 90%. If you don’t want to deal with Lenders Mortgage Insurance (LMI), typically you can’t borrow more than 60%
- You must also possess a clean credit history.
Low doc loans provide a lot of convenience for the self-employed. However, they generally have higher costs, and as such, it’s critical that you take your time to assess whether you can afford the loan. Its also highly recommended that you wait until you possess at least a 20%.
What Is An Income Declaration Form?
When you apply for a loan, banks uses an income declaration form to certify your income. Generally, you’ll have to fill in your name, business name, ABN, the amount you want to borrow along with your indicative repayments. The bottom of the form will contain a declaration stating that the income you mentioned is true and that you’ll be able to provide the repayments.
Every lender provides their own declaration form, so the requirements can vary. Some lenders can offer a no doc option where you don’t have to even declare your income or asset possession. In most cases, you’ll have to verify your liabilities and assets.
What Documents Are Needed For A Loc Doc Loan?
Even though it’s a low doc loan, you still have to submit some documentation. Below are some of the essential documents that a lender may need:
- Last 12 months Business Activity Statements (BAS)
- Australian business number (ABN)
- Registered business name
- Bank account statements for the last few months
- Sometimes you might have to prove that you’re GST registered for a minimum of 12 months.
- You may also have to sign an income declaration form.
Most lenders require a minimum of 2 documents. However, its also important to note that the required documents can differ from lender to lender.
Why Go For A Low Doc Loan?
There are various reasons why people opt for a low doc loan, but the most common factor is because they’re unable to product proof of income. It can also be because:
- You have distributed your income from your trust to your family members.
- Your company structure is too complex.
- You possess huge deductions like depreciation, which isn’t a genuine expense.
- You don’t possess the latest tax returns.
- Delaying for tax planning
Can Low Doc Loans Be Refinanced?
In short, these types of loans can be refinanced. If you’re thinking about refinancing your current loan for a more profitable one, you’ll have to basically reapply for a new loan. It’s important to keep in mind that just because you qualified previously for a low doc loan doesn’t necessarily mean you can refinance now. Instead, you can be subjected to stricter documentation and eligibility requirements.
As such, if you’re refinancing to a low doc loan or purchasing a new property, make sure to update your financials to ensure that you get the best options on the market.
Conclusion
Low doc home loans are a fantastic alternative for those who can’t provide the traditional proof of income. They are simple, fully serviceable loans with very low documentation.
However, you also have to keep in mind that they incur high-interest rate with few features, and most lenders and banks don’t offer them. Be 100% certain that you’ll be able to finance the loan and ask your potential lender as many questions as possible so that you don’t have any doubts about your loan requirements.
It’s best if you consult a specialized local mortgage broker for your low doc loans.
