If you’re self-employed, a contractor or professional investor, or simply unable to prove your income through traditional means, you will need to apply for a Low Doc home loan.
Low doc loans pose a higher risk, not all lenders will offer this type of loan and if they do they might apply greater restrictions, such as the following:
Higher interest rates: This will depend on the lender and the verification or supporting documentation that you are able to provide. Some lenders offer the same low rates as they do for full documentation home loans.
Larger deposit: 20% of the purchase price is normally required although some lenders require less.
Lender Mortgage Insurance: Mortgage insurance is normally applicable if you borrow over 60% of the property value.
To apply for low doc loans, you are required to provide documentation that supports your declared income and expenses to the lender. Each lender will have their own requirements and will accept different documentation.
The main documents that can be used to verify your income are:
- 12 months’ BAS statements showing a high turnover.
- An accountant’s letter verifying your income.
- Business bank statements showing a high turnover.
- Old tax returns (over 24 months).
- Interim financial statements.
Other things you should consider
- Asset to income ratio: Lenders will take a more favourable view the better your asset to income ratio. Some are looking for a net asset position that is equal to double your annual gross income.
- Credit history: Lenders always closely scrutinise credit files, but they will look particularly closely at the repayment history of your debts, as they cannot fully verify your income.
- Security property: Lenders will look for prime security properties in high demand locations like capital cities or regional centres. They will tend to avoid properties that are unique, in disrepair or difficult to sell.
- Total exposure: Most lenders prefer low doc borrowers with total debts under $1 million. A few select lenders allow loans of up to $2.5m per borrower group (e.g. a husband and wife’s total borrowings together).
- Equity releases: It is normal to have to prove how the loan funds will be used if money is being directly released to you. Lenders are anticipating that the borrower may not actually have an income and are using the money to make repayments, or that equity is being released to be used as a deposit to buy further properties.
- Refinances: Some lenders will only allow you to borrow to purchase. They will not refinance existing low document home loan or investment loans. This is because refinances are higher risk than loans used to purchase a property. Borrowers have been caught out by this where they bought vacant land and then later tried to refinance to build.