If you are self-employed and are looking for a home loan but cannot tick the usual loan application boxes, perhaps you don’t have your tax returns or business financial statements ready or up to date.
But you still want to enter the property market or if you are an existing borrower looking for a better deal or some cash out for any worthwhile purpose and you can’t supply the usual loan application documents, a Low doc or Alt Doc home loan may be an option.
What is a low doc home loan?
A Low Doc or Alt Doc Home Loan offer a flexible financial solution to self-employed borrowers who cannot provide the usual income verification documents using traditional methods.
Perhaps your business income has increased over the last 6 to 12 months compared to your last business tax return?
This higher income may allow you to borrow more than you otherwise might than if you relied on the last two years’ business tax returns.
The main reason is that for full doc loans lenders usually are looking backwards at your trading history, which is usually done by relying on the last two years business tax returns to determine the amount of loan you can afford.
If your business income has increased significantly over say the last 6 months, relying on your business’s past performance could put you at a disadvantage.
This is where a low doc or alt doc loan may assist.
To qualify for these loans, Low Doc or Alt Doc lenders require less or alternative supporting documents to verify your ability to service the loan, i.e., less, or alternative paperwork to prove you have the income to repay the debt.
How does a Low Doc Loan Work?
Most low doc loans require an LVR of 80% or less, meaning you will need a larger deposit or enough free equity in an existing property, there are a few lenders that may offer a higher LVR than 80% but usually at a higher interest rate than what you would get with and LVR of 80% or less.
Low doc lending usually will have a higher interest rate than full doc lending as lenders see these type of loans as higher risk. There is a saying in the lending world, (rate for risk), the higher the risk, usually the higher the interest rate.
Compare Low Doc Home Loans
A quick search on the internet will bring up a lot of information on Low Doc or Alt Doc loans.
Check the facts and be careful on what you read on the internet about Low Doc or Alt Doc lending as some of the information could be incorrect or outdated, therefore it’s always a good idea to speak with an expert and get the latest up-to-date information.
There are fewer lenders in the low doc home loan space than full doc lenders, there are several non bank lenders who offer these solutions.
The main reason is that Lenders view Low Doc or Alt Doc lending carries more risk than traditional lenders.
Larger Deposit
Compared to Full Doc loans you usually need to have a larger deposit, you may also have to pay lenders mortgage insurance if you borrow over 60% LVR, this is not always the case so it’s always a good idea to seek advice as each lender has their own criteria and risk appetite.
Depending on the LVR and your situation, you may have to pay a lender’s risk fee as well.
Which Low Doc Home Loan Lenders can Help Me?
This really depends on your individual situation. Some factors that will determine what kind of lender can be approached are:
What kind of property are you looking at buying? I.e. what is the security property?
What is the purchase price of the property?
What is the property value?
What is the location of the property?
How much deposit do you have?
What is your financial position?
What kind of your credit history do you have?
Your assists and liabilities.
How long you have been self employed for?
What is your declared income?
Rather than try to do it yourself, it might be a good idea to seek professional help from a mortgage broker that specializes in helping self-employed borrowers get into a property, either as a home to live in or as an investment property.
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What Documentation is Required For a Low Doc Loan?
The word Low Doc implies that there is less paperwork, which is not always the case. Most lenders will want to see just as much documentation as a full doc home loan but will use an alternative way to verify income.
This is usually done by using either 12 months BAS statements or 6 months BAS statements, or 6 months or 12 months business bank statements sometimes’s a combination of both.
If you have investment income, say in the form on rental income lenders will want to see evidence of this as well, and will verify it either via a rental statement, lease agreement or if it’s a private rental agreement by rental deposit to your account.
In most cases, all other requirements are often the same as you would expect with a full doc home loan that you would expect to supply any of the major banks.
Such as bank statements, identity documents, and your financial position.
The better word to describe a low doc home loan would be an Alt Doc home loan, but since most people still refer to these types of loans as Low Doc, many people use the two words interchangeably.
Who are Low Doc Loans For?
Low Doc or Alt Doc home loans are for self employed people that cannot provide the usual documentation to quality for a full doc loan.
Unlike a full doc loan, a low doc or alt doc home loan are not suitable for PAYG borrowers unless they are a Co Applicant with a self employed or small business owner.
What are the Key Differences Between a Low Doc and Full Doc Home Loan?
From the perspective of having a home loan, there is no difference. The major difference is how the lender verifies your income to prove you can service the loan.
Lenders will want to make sure you can repay the debt without any financial hardship.
Low doc home loans are useful for self employed small business owners who don’t have two years tax returns or full company financial reports available that apply to full doc home loans.
How Can I get Approved for a Low Doc or Alt Doc home loan?
If you are a Low Doc or Alt Doc borrower, it might make sense to speak with a mortgage specialist who holds an Australian Credit Licence they will give you personal advice based on your situation, they will discuss with you what eligibility criteria you will need to meet in order that your loan application is likely to be approved.
An accredited mortgage broker can discuss loan amounts, loan features, what financial documentation each lender requires, what the lending criteria is that you will need to meet, i.e. business bank statements, draft business financial statements.
Your broker will also be able to provide you with several lenders, non bank lenders and discuss the pros and cons of each credit provider.
They will also provide you with the current fees and charges, if there are any additional fees and what the actual interest rates and comparison rates are as well.
They will discuss with you your credit history and, providing you give them written consent, they may be able to obtain your credit file for you.
Business Activity Statements (BAS)
Usually with a low doc home loan you will need to provide BAS statements as income verification, depending on the lender and their criteria. This can range from either the last two BAS statements or the last 12 months BAS statements.
You may also have to prove that your GST has been paid. Sometimes lenders ask for a copy of the ATO portal as evidence that you don’t have any outstanding tax liability.
Although some lenders will allow you to get cash out to pay ATO debt, this would apply if you were an existing property owner.
Reasonable Income for Age and Occupation
Depending on your current situation lenders will want to see if the income you declare makes sense, for example, if you are not registered for GST and declare an income over $75,000 per year, they would likely decline this as they would see it as inconsistent.
Registered Business or Company Name and ABN
Since Low Doc or Alt Doc home loans are designed for self employed borrowers or small business owners, you will need to have a ABN registered, usually for at least the last 2 years, although there are still options available for a shorter ABN (Australian Business Number) registration.
Shorter ABN Registration
Generally speaking if your ABN is shorter than 2 years you would most likely be seen as higher risk and you can expect that most lenders would charge a higher interest rates.
GST Registration
Depending on the income that you are declaring, you will need to be registered for GST unless the income that you are declaring is less than $75,000 per year, this however, would lower your borrowing capacity.
Self-Verified Income Declaration
Usually lending criteria for a low doc loan or alt doc home loans requires that you self declare your income using a self-verified income declaration form which is usually part of the application process.
Accountants Declaration
Some lenders will also want an accountant’s declaration, depending on their criteria, often you may be able to use 2 forms of income verification which could be BAS and Business bank statements or BAS and Accountants declaration.
Find the Right Lender
Finding the right lender is important for Low Doc borrowers but how do you go about this without getting confused or feeling overwhelmed?
Speak With a Professional
Generally speaking its usually best to speak to a professional who will match your scenario to the right lender whether that’s with a Bank, non bank lender or other credit provider.
Understand what Lenders Look for with Low Doc Home Loans.
Although Low Doc or Alt Doc lending requires low documentation, each lender has different lending requirements, and each lender has their own target market determination, i.e. what kind of borrower they are looking to service.
A professional will go over details to what each lender requires as far as the minimal documentation is required for a Low Doc loan or Alt Doc loans, for example, BAS, business bank statements.
They will also be able to work out your debt to income ratio, advise you what the lender’s interests rates are and what the comparison rate is based on your individual situation.
Comparison Rates
Comparison rate is the actual interest rate you pay once you factor in all fees and charges on the Low Doc home loan. Think of it as the bottom line, i.e. what are you out-of-pocket expenses.
Lenders Mortgage Insurance
They will also advise you if you will have to pay lenders mortgage insurance. This will depend on what the loan to value ratio works out to be. They will discuss options on the pros and cons of variable rate vs fixed rates.
If you are happy to proceed, they will prepare your application for a low documentation home loan.
What about ‘no doc’ loans?
No doc loans are not very common anymore, especially regarding residential lending, they would apply more in the commercial lending space, as any lending that falls under the NCCP (National Consumer Credit Protection Act) could not offer a no doc loan as they cannot verify your income.
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