One of the primary ways a lender establishes whether you’re a good candidate for a loan is through your income. Should you be able to comfortably afford to cover your mortgage payments each month in addition to any other bills and expenses you are responsible for? If so – and if you have a reasonably clear credit history – you most likely will qualify for the loan.
However, this calculation is dependent on a regular salary provided by your employer. What happens if you are self employed and cannot provide payslips to the lending agent as proof of income?
Fortunately, lenders offer a special type of loan for self-employed applicants. These low doc loans, also known as lite doc or alt doc home loans, help you establish your financial health to the lender.
Who can apply for a low doc loan?
Low doc loans were created specifically for – and can only be used by – those who are self-employed. That’s because self-employed applicants traditionally are viewed as a higher risk for lenders, which makes obtaining a traditional loan more difficult.
When they were first introduced in Australia, low doc loans were only made available by a limited number of lenders who only offered loans at high interest rates and greatly restricted their lending criteria. However, in the years since, low doc loans have become somewhat more readily available.
Instead of providing the last two years’ tax returns and assessments, two years of financial statements, and a business activity statement (BAS) – all of which can be a major headache to gather – low doc loans reduce the amount of paperwork you need to provide.
All you’ll need to apply for a low doc loan is your income and reduced income evidence via a BAS.
You will also be asked to prove that your company is legitimate by providing a valid Australian Business Number, or ABN. Depending on the lender, this ABN may have to have been active for at least two years and be registered for Goods and Services Tax, or GST. However, these rules aren’t universal and some lenders will consider ABNs that have only been valid for as few as six months.
How do you qualify?
Once you have submitted the proper paperwork, your lender will examine all of the information to decide whether you qualify for a loan. In general, these applications are assessed on the overall strength and consistency of the application. This includes your self-employed tenure, your credit history, your self-certified income, and other supporting documents. Like other loans, the lender will also examine your equity/contribution to the transaction.
Conditions for low doc loans
While many lenders will consider a low doc loan, the terms may be somewhat different than they might be for a traditional home loan. Here are a few differences to keep your eye out for:
Higher interest rates: While the rates on a low doc home loan aren’t always higher than a traditional loan, they are often seen as a somewhat riskier investment on the part of the lender. This manifests itself in the form of higher interest rates when compared to a similar traditional home loan
LMI: If you are borrowing more than 60 per cent of the loan to value ratio of the home, you will most likely need to pay for lenders mortgage insurance, or LMI.
More money down: You should expect to have at least 20 per cent of the home’s value as a deposit, though not all lenders will require that much.
Credit history: Because you do not have an established income the way a salaried employee does, lenders will be sure to examine your financial background to verify your creditworthiness. They may consider the age of any defaults you have, with newer ones counting against your application.
Property location: Beyond your financial soundness, the lender will want to learn more about the property that you are seeking to purchase. Should you fail to repay your loan, the lender will take possession of it. Therefore, the lender will want to ensure they can sell it to regain lost profits with as little hassle as possible. For that reason, high-demand locations like city centres and popular neighbourhoods are more appealing.
Total exposure: Lenders will always look into any other debts you owe. In most cases, lenders prefer low doc borrowers who hold total debts of less than $1 million. There are exceptions, where lenders will consider those whose debts are as high as $2.5 million, but those candidates would have to also hold significant additional assets.
Is a low doc loan right for you?
Because low doc loans are a flexible solution for Australians who are self-employed, consider applying for this simple and cost-effective mortgage loan to purchase your dream home without the headache of all of the additional paperwork.
