For borrowers who are self-employed or who don’t have the right income verification documents to qualify for a traditional loan, low doc loans are an alternative mortgage financing option.
But, there are some important differences between low doc loans and a normal full documentation loan. There are also huge differences from one lender to the next as each comes with its own criteria.
If you are thinking of applying for a low doc loan, learn more about what is involved, what documents you can use for income verification, and weigh the pros and cons of low doc loans to help you decide if this is the best option for you.
What Are Low Doc Loans?
Normally, when someone applies for a home loan, they have to supply a relatively standard set of documents so the bank can verify their income. These documents include recent tax returns and pay stubs – some very normal documentation for any employee who receives PAYG payments.
But, for business owners, sole traders, contractors, and anyone else who is self-employed, you won’t have pay stubs from an employer. You also may not have two years’ worth of tax returns that reflect your current line of work, depending on when you became self-employed.
When you don’t have the full documentation that lenders require, you won’t be able to apply for a traditional full doc loan. What you can do instead is use a low doc loan.
With a low doc loan, you’ll still need to have documents to verify your income but lenders will accept alternative documentation, the documents which self-employed borrowers do have.
Changes to Low Doc Loans Post the GFC
After the Global Financial Crisis, measures were taken so banks would take more steps to ensure borrowers can afford a loan. Years ago, it was a more straightforward process to get approved. As long as your ABN had been registered for two years, you wouldn’t have to work very hard to prove your income.
In 2009, the National Consumer Credit Protection Act was passed, requiring the banks to tighten their lending criteria. Now, there’s quite a bit of documentation you need, which is why low doc loans aren’t exactly ‘low doc’ any longer. Today’s low doc home loan is more an alternative loan. You may even have already noticed that some lenders call their low doc products ‘alt doc.’
Which Types of Mortgages Are Hard to Get with a Low Doc Loan?
The reality is, there’s more pressure today than there used to be for banks to be diligent about taking on as little risk as possible. Low doc loans are viewed as a higher risk by lenders, which is why you’ll see higher interest rates, stricter LMI standards and higher fees with low doc loans.
You’ll also find that it’s difficult to get financing for specific types of loan products, most of which are themselves associated with some risk for banks:
- Construction loans
- Cash out loans
- Refinancing, if your current loan is a low doc loan or is from a specialist lender
- Bad credit loans
Comparing Low Doc Loans
When comparing low doc loans, you’ll notice more variety form one lender to another than with full documentation loan products. Because of this, it’s important to do plenty of research on home loan products to try and find the most attractive low doc loans that you are likely to qualify for. It can also help to talk with a mortgage broker so you don’t settle with a high interest rate or miss out on the features you want.
- A lot of low doc loans have higher rates but there are some lenders who have low doc loans with rates that are comparable to full doc loans.
- In most cases, you’ll need at least a 20% deposit. But, if you have clean credit, there are some lenders that are more flexible with low doc loans.
Talk to one of our mortgage brokers who specialise in low doc loans. Call us on (07) 3146 5732 or fill out our online enquiry form today.
Do All Low Doc Loans Require LMI?
With low doc loans, you are going to have to pay Lender’s Mortgage Insurance (LMI) unless you have a very large deposit.
For traditional loans, banks will usually waive LMI if you borrow 80% of the Loan to Value Ratio (LVR) or less. If you are a working professional in preferred industries, such as law, medicine, or accounting, you can avoid LMI with an even higher LVR.
With low doc loans, however, you can only borrow 60% of the property value to qualify for waived LMI.
What’s the Process of Getting Approved for a Low Doc Loan?
Low doc loan approval isn’t the straightforward process it once was. That doesn’t mean you can’t qualify for a loan if you’re self-employed. It merely means you have a longer loan approval to-do list:
Step one: Determine what documents you do have and what you are looking for in a loan (loan amount, features, and interest rate).
Step two: Find out which lenders you are likely to qualify with. If you aren’t sure, you can call us on (07) 3146 5732 or contact us here.
Step three: Narrow down your top lender based on the interest rate, the features you need, the cost of LMI through the lender’s insurer, and loan fees.
Step four: Fill out your application, presenting only the necessary documentation, not extra documents. If you present extra documents that serve as partial proof for a year your lender was never looking at anyway, the lender is required to ask for full financial statements.
Low Doc Loan FAQs
What documents do I need to verify my income?
Every lender will have their own unique requirements for income verification. But, in general, they’ll want to get an accurate picture of your income over the past 12 months, or longer.
Expect to provide most or all of these documents:
- BAS statements for the past 6 to 12 months
- Business bank statements for the past 6 to 12 months
- Evidence of ABN registration for 12 to 24 months
- An accountant’s letter, which verifies your income
Keep in mind, your lender will want to see a high turnover when they see your financial statements. If you just started out as a business owner and are still putting a lot of money into your business so your income doesn’t look as high on paper, it may be hard to qualify.
If you have any questions, don’t hesitate to call us on (07) 3146 5732.
Do I have to get a low doc loan if self-employed?
No, you definitely don’t have to. If you have a full two years’ worth of financial documentation – all of which demonstrates your high, stable income – you can qualify for a traditional home loan as a self-employed borrower.
You’ll need the last two years’ worth of:
- Business and personal tax returns
- Notices of assessment
- Profit and loss statements
Will any lenders accept high LVR low doc loans?
With low doc home loans, borrowing less of the property value and having a larger deposit will make it a lot easier to get a competitive interest rate. But, there are a small number of lenders that will consider an 80% LVR loan, or sometimes a higher LVR loan. Just be aware that with a higher LVR, your fees and interest rate will be higher.
How long does your business need to be registered for?
In general, lenders will want to see that you have a registered ABN and have been registered for GST for two years. There are some who are flexible with this requirement.
The Australian Taxation Office doesn’t require you to register for GST until your annual turnover is, or is expected to be, over $75k. But, if you plan on applying for a home loan, it may be helpful to register for GST sooner rather than later. To help decide how to navigate these nuances, you may benefit from talking with your accountant or financial advisor.
What should my asset position look like?
It helps to have a strong asset to income ratio. Ideally, your assets have a net value of twice your income. So, if you earn $80k in annual income, you should have $160k in net assets, meaning your assets minus your liabilities.
Not all lenders have this requirement. Also, some are more lenient with younger borrowers, understanding you may not have had enough time to build such a robust asset position.
How important is good credit for low doc loans?
Lenders are going to put more weight on your credit history. You’ll want to have a history of on-time payments, especially over the past 12 months.
There are some specialist lenders who will work with low doc borrowers with a bad credit history. Keep in mind, however, there will likely be high rates and high fees, which can make it harder to pay down your mortgage quickly.
How flexible are lenders with the type of property you purchase?
Especially in the case of low doc loans, you will have a difficult time getting a mortgage for any type of ‘alternative’ property. If the bank may have trouble selling your property if you default, such as if it is in a rural location, a mining town, or is simply a unique property, they’ll think twice about issuing you a mortgage.
Lenders will be more likely to approve a loan for a property in a high demand area in any of the major cities or regional centres. This is because they know they can sell the property quickly, even if you do default.
How much can you borrow with a low doc loan?
Your maximum will depend on both the lender and you – in particular, your debts. Lenders prefer low doc borrowers to have total debts below $1 million. There are exceptions, especially if you have a high asset value.
To talk to one of our low doc loan specialists, fill out our enquiry form or call us on (07) 3146 5732.
Low Doc Loan Features
When you are in the market for a low doc loan, you should try to get the loan features you want. Some features can make it easier to pay down your loan faster or they offer the flexibility you need, while others offer peace of mind.
What features do you want?
- Free extra repayments
- 100% offset account
- Fixed interest rates
- Split loans
- Interest only
- Line of credit
There are some features you won’t be likely to get with a low doc loan like repayments breaks and low introductory interest rates.
Should I Get a Low Doc Loan?
Low doc loans are a great option if you can’t qualify for a full doc loan because you don’t have the proper documentation. But, they aren’t for everyone. If you don’t qualify for a competitive low doc loan, you may end up paying a lot in interest and fees.
You’ll benefit from a low doc loan if:
- You have saved a large deposit
- You have good credit
- Your asset to income ratio is strong and you’re carrying minimal debt
- You have a fluctuating income or you had a low-income year on paper in the past two years
- You are a professional investor
If you want to learn more about what lenders have available for low doc loan borrowers, or if you aren’t sure if a low doc loan is right for you or not, fill out our online enquiry form or call us on (07) 3146 5732 to talk with one of our experienced mortgage brokers.