Low-Doc loans are loans for borrowers who are unable to provide all the documentation needed for a regular home loan. These loans generally carry higher interest rates, but for the self employed, or the newly immigrated, they can provide much-needed financing in the absence of other options.
A normal home loan requires tax returns, financial statements, income statements, and other documentation to prove a steady income. Self employed, seasonal or contract workers may have trouble providing this kind of paperwork, and may need to go with the low-doc route.
Who Are They For?
Low-doc loans are not meant for the unemployed or those with bad credit history, but for Australians who are financially stable and have a good record of repaying loans. Since the lender is taking on more risk and essentially trusting the borrower’s word on their income, rates and fees tend to be higher.
While low doc loans were less flexible in the past, many mainstream lenders have started offering them and low-doc loans have in turn become more like regular loans. They often come in just as many varieties as standard home loans such as fixed, variable or mixed rates with features like offset accounts or redraw facilities.
For borrowers who have mediocre credit, a non-conforming loan is generally more suitable. Non-conforming loans are loans to borrowers who don’t fit mainstream lenders’ strict credit criteria. While a low-doc loan will generally be 80% or less than the property value, a non-conforming loan can be one that covers the entire value of the property.
The only downside is that non-conforming loans come up at a premium price with double-digit interest rates not unheard of. For home buyers who are unable to get a home loan through regular means, a non-conforming loan can be a way to buy a house and also a path to repairing credit history.
How to Get a Low-Doc Loan
Different lenders have different requirements. You’ll still need to provide some sort of proof of income. While traditional home loans will require more official paperwork, with low-doc loans the more documentation you can provide the better.
You will generally need to declare income that satisfies the terms of the loan (self-certification), provide your ABN and Business Activity Statements (BAS), tax statements if available, as well as documentation of any other loans or debts you currently have.
Less stringent lenders may offer loans with even less formal documentation but require other assets as loan collateral, however these loans will generally be at higher rates and on less favourable terms.
Pros and Cons
Low-doc loans are a great option and sometimes the only choice for the self-employed, but the simplified application comes at a cost. Low-doc loans will generally command higher setup and maintenance fees, and interest rates will be higher than normal loans. Mortgage insurance is usually mandatory.
Security deposit could be required, such as a car, investments, or other assets. The loan period may also be substantially shorter, meaning the loan has to repaid quicker. Refinancing may be mandatory after a certain period of time as short as one year.
For the self employed, new immigrants to Australia, contract workers and other home buyers who may have difficulty proving a steady income, low-doc loans are one way for them to buy a home, but the financial costs should also be weighed.