Ever heard of a low doc home loan but not really sure what it all means? If you are self-employed or a contractor this may be of interest to you.
Low doc loan explained
A Low-doc home loan is for those who may not be able to provide the full documentation which is typically required for a mortgage application. It is generally for self-employed people, but is also used sometimes for contractors, casual workers and even those with a poor credit history. Lenders traditionally only approved loan applications for those who had guaranteed incomes and could prove them.
The Low-doc loan was introduced so that they could lend to more borrowers who do not have regular incomes, but have enough equity in their current property. It relies more on self-verification of income.
Why take out a low doc loan?
If you fall into the category above, a low doc loan may be the only option available to you to purchase a property. You need to keep in mind that the interest rates on these types of loans may be higher because they are deemed as more risky by the lender. Mortgage insurance is also required which could have inflated prices.
Most commonly these types of loans will cover up to 80% of the value of the property. In some cases if you can provide more financial evidence you may be able to receive more.
What are the types of low doc loans?
There are three different types of low doc loans that are available depending on a person’s eligibility.
This is the most common where a borrower has to give a signed declaration of their income. If approved they will receive a loan up to 80% of their value of their property. Whilst the interest rates are fairly comparable to regular loans, the mortgage premium insurance may be more.
The interest rate for this type of loan is usually higher mainly because no documents or proof of income are needed. The loan is given on the basis of security of the property’s value. You may find because of this you will be able to borrow less of the property’s value.
Again the interest rate is generally higher and requires more proof of income which can be a letter from your accountant.
Disadvantages of low doc loans
There are negatives attached to low doc loans which may come at extra costs. Generally the interest rates are higher which could be reduced with more financial documentation. Mortgage insurance is compulsory and there may be more fees and charges involved. You also need a higher deposit due to the low LVR at 80%. Sometimes the bank will require other security such as cars and investments and generally the loans will come with a shorter conditions, potentially 1 year for some. Because of the higher costs in most cases, you should make sure you are able to meet the repayments.
Advantages of low doc loans
Despite some of the disadvantages listed above there are some advantages to low doc loans. The loans are specifically for people (mainly self-employed) who have no way to prove their income and therefore would not be able to acquire a home loan. Compared to normal loans little documentation is needed. There are some lenders who may offer comparable interest rates to their normal loans.