If you're looking for a home loan, but are in a job or employment that cannot supply conventional proof of income like regular pay slips and financial statements, don't despair!
A low doc home loan could be the right option to achieve your home ownership goals. It's the perfect way to climb the property ladder without extensive financial documentation.
Nonetheless, it's essential to understand how low doc home loans work. In this article, we take a 360-degree view of low doc mortgages in Australia to help you decide if it's the best fit for your circumstances.
What Does Low Doc Mean?
A low doc loan is essentially a low documentation loan catering to self-employed home buyers who are not regular salaried employees. This means they have the income and the assets. However, they don't have PAYG payslips, two years of tax returns, financial records, etc., to show proof of income required for a standard home loan application.
Also known as 'alt doc home loans' by some lenders, they are the only way to borrow loans with less or alternative documentation. Notably, some lenders consider the two to be slightly different.
The distinction is that with an alt doc loan, the borrower needs to provide more evidence of income than a low doc loan. However, with alt doc home loans, the home buyers get more flexibility than a full doc loan.
Low doc loans rely on self-verification of income. You may have to provide a supporting letter from your accountant, recent financial statements, and your last year’s Business Activity Statements (BAS). You can state what you earn with an income declaration document.
So although you won't be required to provide PAYG payslips or tax returns as proof of your income, most lenders will implement other checks and do their credit scoring. These measures help them ascertain your financial position and if you can afford repayments based on declared income.
Nonetheless, lending criteria vary. For example, while most lenders typically will also ask you to verify your assets and liabilities, some will not require you to declare your income and asset position.
How Do Low Doc Home Loans Differ from Standard Loans?
The key differences between a low documentation home loan and a regular home loan may include:
- Deposit: If you opt for a low doc home loan, you should be prepared to show a larger deposit. As these loans have a lower LVR, lenders will usually allow you to borrow up to 80% of your property value. However, a few lenders may let you borrow up to 90%.
- Interest rate: The interest rates may vary depending on the lender. However, in most cases, if you borrow between 80%-90% of the property value, you'll likely have to pay a slightly higher interest rate and/or a risk fee. This compensates lenders who have given you a loan without the standard income verification and for taking increased risks when lending you money. Standard home loan rates generally apply when borrowing up to 60% of the value of your property.
- Minimal documentation: With low doc or alt doc home loans, you don't have to supply pay slips, company financial reports, and other bank statements as proof of income typically required for a full doc home loan. Instead, many lenders will accept an income declaration from you confirming that you can afford the loan and have the ability to make your home loan repayments.
In addition to these key differentiators, some lenders restrict postcodes from which you can buy a home using the low doc option.
Who Should Consider Low Doc Home Loans?
Generally speaking, low doc borrowers have a lot of flexibility. The perfect candidates for accessing a low doc home loan include self-employed workers, small business owners, investors, contract workers, freelancers, casual employees, or part-timers. These self-employed borrowers typically don’t have a regular job where they're taxed on PAYG income.
Explained below are the reasons why specific groups consider a low doc home loan:
1. Self-Employed Australians
If you've been self-employed for a while, you may have the required documentation for a full doc loan. On the other hand, if you have been running your own business only for a few years and/or your income is inconsistent, then you could benefit from a low doc loan by self-certifying that you can afford repayments.
Likewise, sole traders, those in partnerships, or business owners with complex business structures can benefit from alt doc or low doc loans.
If you're an investor, you may not be able to show regular income or employment, mainly where you rely entirely on your investment income.
So, if you're looking for a home loan to purchase a new investment property, an alt doc or low doc home loan may suit your requirements. At the same time, since rental income earned from investment properties is not included in your BAS turnover, ensure that the income you're showing is significant enough to help you qualify.
3. Contract Workers
It will be considered irregular income if you're a contractor working for some time during the year. For this purpose, you may have to opt for a low doc home loan.
In sum, low doc home loans may help you access a suitable home loan in the following circumstances:
- You have a significant combination of assets and income but cannot provide standard paperwork, including returns or financial statements.
- Your tax returns are not incomplete and out of date. For example, your most recently lodged tax returns may be more than a year old and not an accurate indicator of your current income. In that case, alternative documentation, for example, BAS statements, may offer your lender better insights into your current conditions.
- You can provide the required deposit and have a good credit record. These assure that your financial position is stable, and you're less likely to default on your home loan repayments.
Low Doc Loan Requirements
With low doc loans, you won't be required to provide all the documentation as you would on a standard home loan. However, lenders will still require alternative documentation, which typically includes one or more of the following:
1. Business Activity Statements (BAS)
Most lenders will ask you to submit 12 months' statements, verified by the ATO. This will enable your lender to assess your borrowing capacity and if you'll be able to afford the home loan based on your business turnover.
Some banks and lenders require their self employed borrowers to be employed in the same industry for a minimum period of 1 year and should be registered for GST.
Among other conditions, you must register for GST when:
- Your business has a GST turnover of $75,000 or more.
- The turnover of your newly started business is expected to reach the GST threshold (or more) within the first year's commencement.
- Where you're already in business and have reached the GST threshold.
3. ABN/ Registered Business Name
Your lender will seek information related to your business, such as your registered business name and Australian Business Number (ABN). While many lenders require 2 years ABN, some may accept a shorter period. Your credit history also needs to be in good order.
In cases where you don't have to supply payslips or tax returns as evidence of your income, your lender will want you to sign a statement verifying that you earn the amount you have claimed, affirming that you can afford the home loan based on that income.
5. Letter from Accountant
In most cases, you will have to obtain a letter from your accountant confirming that your income is sufficient to help you repay your home loan on time through the loan term.
6. Previous bank statements
Depending on the lender, you will have to show the bank statements of your main business bank account. While these are usually requested for a minimum of six months, some call for a shorter period of statements.
How Much Deposit Do I Need for a Low Doc Loan?
Low doc loans are riskier than standard home loans, so lenders are more likely to require a larger deposit to approve your loan. Here are three general scenarios:
- A 20% deposit: Usually, you'll have to show a minimum deposit that's 20% of the value of your property. Furthermore, with no doc loans, some lenders may want you to pay Lender's Mortgage Insurance (LMI) even where you have a full 20% deposit saved.
- More than 20% deposit: Sometimes, lenders insist on an even bigger deposit. This gives them more security if you cannot make your repayments and they have to sell your property. The bigger your deposit, the lower the interest rate for your home loan. Your credit provider may even offer you discounted interest rates, at par with full doc rates, if you can put in a 40% deposit or more.
- Lower than 20% deposit: At the other extreme, a few lenders may offer you low doc home loan with a deposit as low as 5%-10% of the value of your property, subject to their specific lending criteria.
How Much Can I Borrow on a Low Doc Loan?
Not every lender offers the alt doc or low doc loan option. Usually, the bigger banks are less flexible regarding proving your income.
Nonetheless, knowing how much you can borrow can help you start your low doc home loan journey with greater confidence. So here's a quick summary to help you work out your borrowing capacity.
Borrowing up to 90% of Your Property Value
Very few lenders may be willing to take the risk and offer you a low doc home loan with a maximum LVR of as much as 90 to 95%.
The lender may have specific lending conditions such as loan amount limit and requirements for the property location, i.e., standard house/townhouse/apartment located near a capital city, etc.
So, if you’re looking for more flexible loan options, you may find that non bank lenders are more suited to your home loan needs. Moreover, you'll also have to be prepared for much higher interest rates and costly LMI, which may set you back by a few thousand.
Overall, it's advisable to apply for a 90% loan only if you can prove your income or you intend to quickly reduce your loan to 80% of the value of your property. This would save you from paying higher interest rates for a long duration.
Borrowing up to 80% of Your Property Value
Lenders usually approve 80% of the appraised property’s value if you can provide a high deposit or collateral. In addition, you can access competitive interest rates, though a risk fee may apply.
With some lenders, procuring a signatory significantly improves your chances of getting approved.
Borrowing up to 60% of Your Property Value
A low doc loan at 60% LVR refers to a loan where the lending does not exceed 60% of the value of your property. Most low doc lenders will approve the loans if you're able to contribute 40% deposit or equity.
The chief benefit of 60% LVR low doc home loans is they'll cost you lesser than a low doc at a higher LVR. This is primarily because of your lender's ability to write your loan on their balance sheet and, in most cases, may not require LMI.
Finally, one of the essential requirements to get approved for a low doc 60% LVR home loan is to be self employed and have a valid ABN.
Scenario: Local Barista Sam
Sam has been a barista-owner at a small coffee house for 3 years. With the business performing well, he feels it's time to purchase his own home and move out of his rented apartment.
Sam has a good credit history and has been saving responsibly for a while to buy his dream home. He studies the home loan market and zones in on the low doc home loan option since it seems ideal for self-employed people like him.
Now Sam connects with a lender to seek advice and starts organising documentation required for a low doc home loan application. Simultaneously, he finds a property costing $325,000. He has a deposit of $65,000, which means he will have an LVR of 80%.
Sam shortlists a lender and signs a low doc declaration. He also submits his ATO-verified BAS of the last 12 months, his accountant's letter, and bank statements to the lender while applying for a $260,000 low doc home loan.
Are Low Doc Loans Safe?
Lenders consider alt doc/low doc loans are considered higher risk. Therefore as a borrower, you could face:
- Higher deposit: As a high-risk borrower, your lender may ask you to put a significant amount of money as a deposit. This means that you'll need to have a lot of money. Where your income fluctuates, this could be a bit of a challenge.
- Higher interest rates: As low doc home loans are riskier, the interest rates charged by lenders are typically higher. Where your income may not be regular, this could significantly impact your financial situation.
- Fewer loan features: You may not be able to access loan features like offset and redraw. These features add flexibility to loans, making it easier to manage your repayments and repay your loan faster.
- LMI and additional fees: Depending on the lender, if your borrowing is over 60%, you may have to incur costly LMI. Moreover, lenders often attach additional fees such as overhead, processing, etc. These added expenses may increase your financial burden.
- Limited options: Some banks and lenders do not offer low doc loans. This reduces your ability to find competitive rates and home loan products.
How Do I Qualify for a Low Doc Loan?
Navigating approvals for your low doc home loan may sound like a complex task. However, these tried and tested tips may help you streamline the process:
- Set the foundation: Determine the loan amount, which lenders suit your specific needs, and your ability to offer them the relevant documents.
- Explore your options: Shortlist lenders offering you the lowest interest rate and attractive loan features. Also, watch for hidden fees, if any. Finally, seek details related to LMI premium, and choose the one that works best for you.
- Explore options where you are allowed to refinance to a full doc loan once you do your tax returns.
- Prepare and present: Prepare your application thoroughly, and present it in a way that's considered favourably by your lender.
Tips to Ensure Approval on Low Doc Home Loan
Go with a Lender that Offers You a Suitable Deal
Regarding your low doc or alt doc home loans, you may have realised that lending criteria vary. Given your loan requirements and nature of employment, look for a credit provider who understands your unique circumstances. This will give you a better deal on your low doc home loan.
Address Your Lender's Requirements
Lenders want to know your borrowing capacity as it directly impacts their risk. Therefore, they will assess your loan application based on the information you provide about your current business situation, asset position and liabilities, and taxable income.
The higher your taxable income, the better your borrowing power. Discuss with your accountant about presenting your low doc home loan application in an authentic way that addresses your lender's concerns.
Be Aware of Your Credit Score
Know your credit score and the details of your recent credit history. As a low doc borrower, you'll likely need a higher credit score to qualify for a loan. Therefore, request a copy of your credit file, clean up any errors before applying, and ensure it’s in proper order.
Demonstrate Responsible Saving Behaviour
Lenders will be looking at your capacity to save. They'll want to see that you have a good history of putting money away regularly and have been doing so for at least 3-6 months. Therefore ensure your savings records have at least a 3-month record of consistent deposits.
Get Your Asset-Income Ratio Right
Maintain a good asset-to-income ratio as lenders like to see a secure net asset position. A good asset-to-income ratio is considered to be 2:1. For example, if your income is $200,000, you should ideally have around $400,000 in assets.
Be Truthful in Your Declaration
Banks and lenders are required to ensure responsible lending. For this reason, they'll look at various factors when assessing your declared occupation and income. For example, a 20-year-old freelancer would mostly likely be refused a loan if they reported an income of $250,000.
Also, manipulating the accounts may land you in trouble with the ATO if it uses this declaration as the basis for your tax return. To avoid this, be truthful in your declaration.
How Joust Can Help
Joust's Instant Match is a great way to get in touch with Aussie home loan experts who can help you find the right low doc home loan.
Our process is simple and stress-free. Just tell us what you're looking for in a loan, and our superior matching technology will find a loan that meets your needs and budget.
The best part is that this service is fully secure and completely free! Try it and see how easy and convenient it is to access great alt doc or low doc home loans with Joust.