What are Low Doc Home Loans?
Homebuyers without standard PAYG payslips, financial statements or tax returns can still become homeowners – they may just need to apply for low doc home loans rather than a standard home loan as an option.
Low doc home loans, also known as alt doc home loans, have been specifically designed to meet the needs of the many people who earn an income suitable for buying a home but may not have the correct paperwork to prove it.
For example, low doc loans could be the solution for self-employed borrowers.
However, not all standard lenders offer a low doc home loan option, so it’s worth employing the skills of a specialist mortgage broker who can find the perfect lender and negotiate the best deal for your pocket.
Because they are structured differently from standard home loans, it’s also worth researching how they work and whether a low doc home loan could benefit you.
So, to help you navigate low doc loans, here are a few things you need to know, including who can qualify for one, how they work, what documentation you need and how a mortgage broker can help.
Who Can Qualify for a Low Doc Home Loan?
Suppose you’re in a financial position to apply for a home loan but don’t have the documentation or financial statements needed for a standard home loan application. In that case, you may be eligible for a low doc home loan.
People who may find themselves in this position include:
- self-employed borrowers,
- small business owners,
- sole traders,
- contract workers,
- seasonal workers,
- people with a bad credit history, and
- professional investors.
How Do Low Doc Home Loans Work?
It’s important to note that banks and non-bank lenders who offer low doc home loans don’t ask for less proof of income than traditional loans, but instead, they require different types of proof of income.
Instead of providing two years’ tax returns, financial statements and PAYG payslips for the past three months like a regular employee would, there are other certification requirements to prove your income and financial status, depending on your situation.
What Documentation Is Required To Apply For Low Doc Loans?
The required documentation will be situation-specific, so while there are general guidelines, mortgage brokers can help establish exactly what you need to apply.
Ensure that all your financial statements and records are up to date, and aim to maintain a good credit history to improve your chances of being approved.
Some of the documentation needed to meet the low doc home loan lending criteria includes:
- your Australian Business Number (ABN) registered for over 24 months,
- your registered business name,
- proof of GST registration,
- a Borrower’s Income Declaration, signed, with your income present,
- a letter from your accountant verifying your financial position,
- latest Business Activity Statements (BAS) verified by the Australian Tax Office (ATO),
- profit and loss statements,
- your Goods and Service Tax (GST) registration,
- personal tax returns,
- several months worth of bank statements.
Are There Any Cons of a Low Doc Loan?
Many features available for standard home loans apply for low doc home loans, too, such as:
- interest-only repayments,
- offset account and redraw facility,
- line of credit,
- the choice between a fixed rate home loan or a variable interest rate, and
- split home loans.
But, there are a few things that you should take into account before deciding whether low doc home loans are suitable for you.
Because you can’t prove your income the traditional way, banks and non-bank lenders see you as a higher risk. This leads to four things:
- many lenders don’t offer low doc loans at all,
- the lenders who do offer low doc home loans have more requirements, so being approved isn’t the easiest,
- lenders charge higher interest rates and fees on low doc home loans to mitigate risk for themselves, and
- they generally will charge a risk fee of up to 2% of the loan amount.
Something else to consider is that low doc home loans don’t provide the option of a third-party guarantee, such as a family pledge loan where a member of your family can guarantee your home loan using the equity in their home.
Lenders take insurance on the borrower’s mortgage at the borrower’s expense to cover any defaulted payments. Standard home loans consider a 20% deposit as enough security and then waive LMI.
A significant factor is how much a deposit is required to waive Lenders Mortgage Insurance (LMI). It’s very uncommon for lenders to approve low doc home loans with less than a 20% deposit upfront.
This means if you can’t afford more than a 20% deposit, in comparison to a standard home loan, you’ll have to pay:
- a higher interest rate,
- a higher deposit, and
How Mortgage Brokers Can Help
At The Mortgage Agency, we take a holistic approach to your financial needs: if a low doc home loan isn’t the best option for you, we can help you find the right one.
Because lenders are so particular about the required documentation, we will guide you through the entire process.
Remember, a lender may not ignore a document that has been submitted, even if it was submitted accidentally. Therefore, it’s absolutely crucial to submit the correct documentation as you don’t want to have numerous home loan rejections on your credit history.
Once we have established qualifying lenders and submitted your documents, we will negotiate the best possible fees, interest rates and LMI premium for you as our customer.
Then, once you’re approved for your dream home or investment property, we will continue to provide support with every step of the way. Note that a low doc home loan will have a more complex refinancing process should you want to do so in the future, and we can assist you with that.
A low doc home loan is a saving grace to many Australians with irregular incomes.
But they do come at a hefty price.
A mortgage broker will save you the headache of navigating the rest if you can provide the necessary documentation and afford the extra fees and charges.
Although these home loans are more challenging to be approved for, our brokers from The Mortgage Agency are experienced in helping clients successfully apply for low doc home loans and are more than able to help you reach your financial goals.
Contact us today, and we can help you get started on your journey.
Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.