Low Documentation Home Loans
Low doc home loans aren’t your traditional home loan, but they can be the key to home ownership for self-employed workers and small business owners. If you don’t have the standard documentation a lender requires for a mortgage, don’t give up hope.
Fortunately, there are low doc loans for these exact circumstances. Ahead, we’ll take a look at low doc home loans, what documents you’ll need, and the stipulations that come along with them.
- Low doc home loans allow borrowers to secure loans without the traditional forms of documentation.
- These loans generally require a higher deposit and may have a higher interest rate than traditional home loans.
- Although these loans can give self-employed borrowers a chance at owning a home, full doc home loans are usually preferable if you have enough documentation.
What is a Low Documentation Home Loan?
A low documentation—or low doc—home loan is just what the name suggests. These loans allow borrowers to get a home loan while providing minimal paperwork as proof of income.
These home loans are most common for those who are self-employed. For example, freelancers, small business owners, or contractors.
These types of workers often don’t have the traditional documentation they need to secure a regular—or full documentation—home loan. Thankfully, low doc home loans are a viable alternative. In fact, they are sometimes called alt-doc home loans.
Lenders haven’t always offered low doc home loans. In the 1990s, mortgage brokers saw a gap in the market to help self-employed people get loans, and the low doc home loan was born.
As demand for this type of loan increased, some of the larger banks started to take notice. Now, low doc home loans are available from a wide range of lenders.
Before these loans became popular, people who were self-employed or owned their own businesses were in a tough position. It’s now a better time to be a self-employed worker looking for a home, though there are drawbacks to these loan types; more on this ahead.
What Documentation Will You Need?
Some people confuse low doc home loans with no doc home loans. The two may sound similar, but they are not the same.
No doc home loans are very rare in Australia. These loans allow you to borrow funds from a bank or broker without providing any income documentation. You’ll be hard-pressed to find many of these loans, and when you do, they’ll often come with steep requirements.
Low doc home loans do require you to provide some information to the lender. You still won’t need all the documentation that a traditional mortgage requires, but you will need some of it.
The table above shows some of the documentation you may need to provide for a low doc loan. It might seem like a lot at first, but you likely won’t have to provide all of these documents to receive approval. Instead, most lenders will take two or three of these documents as proof of income, rather than all of the items on the list for a full doc loan.
Lenders each have their own requirements for documentation on low doc loans, but usually work with the borrower to secure the right paperwork. In general, the bank will want to see some form of proof that you’re gainfully employed.
Low Doc Construction Loans
Looking to build a new construction but don’t have the standard proof of income? You may be able to apply for a low doc construction home loan. These loans are similar to traditional low doc loans. They allow you to apply for a loan with alternative documentation, but also come with higher interest rates and deposit requirements.
In general, construction loans have become more difficult to obtain through some banks in Australia. Consulting with a mortgage broker might be your best option if you want to maximise your chances of securing one of these loans.
As with most construction loans, lenders release payment on low doc construction loans as the stages of construction are completed.
Some lenders have specific requirements, such as requiring you to receive a quote from a certified builder. Check with the lender or your mortgage broker for more information about the borrowing requirements for each loan application.
Other Low Doc Loan Requirements
Low doc home loans aren’t a free pass for potential borrowers. In other words, you’ll still have to meet some of the basic lending criteria, regardless of your documentation.
Lenders will be considering a range of factors when assessing the risk of lending to you. These factors may include:
- Length of time you have been in your current position
- Value of the property you are considering
- Loan-to-value ratio (LVR)
- Credit history
The additional requirements of a low doc home loan will vary depending on your lender. Almost every lender will expect a good or excellent credit score. Some will also have duration requirements. For instance, they might require that you’ve been self-employed for one or two years.
What Borrowing Options Do You Have?
You will have many of the same loan options if you decide to go the low doc home loan. You can choose between fixed or variable rate loans, though some special options like offset accounts might be limited, depending on the lender.
The real difference between a low doc home loan and a regular home loan are the stipulations. Many full doc loans will allow you to borrow up to 80% of a property’s value without paying lenders mortgage insurance, or LMI.
LMI is insurance that the borrower pays, but it protects the lender in the event that the borrower defaults on the loan.
Lenders usually prefer low doc home loan borrowers to be closer to 60% LVR in order to avoid paying LMI. This means you probably won’t find many low doc home loans with 95% LVR, though it is possible. However, you may lose out on features or have more restrictions on the loan.
Many lenders cap their low doc home loan LVR at 80%, and may require lenders mortgage insurance. Ubank, for example, will only allow you to borrow up to 80% of the home’s value with low doc home loans.
The result? Many low doc home loan borrowers have to put down a larger initial deposit on the property.
You can expect a low doc home loan to have a higher interest rate. With fewer documents to support your income, you present a greater risk for the bank. One of the ways they mitigate this risk is by charging you a higher rate.
Many nontraditional borrowers are faced with the following decision: should I pay a higher interest rate and larger deposit to get into the property market now, or wait until I have enough documentation to qualify for a full doc home loan?
The answer depends on your financial situation and home ownership goals.
Are Low Doc Loans The Only Answer?
As we’ve covered, low doc loans are the key for many self-employed workers who want to enter the housing market. However, there are trade-offs, like high interest rates and high deposit requirements.
Low doc home loans aren’t the only option for self-employed people. Many small business owners and self-employed workers are still able to secure a full doc home loan through certain lenders.