LOW DOC LOAN
A low doc loan is used by borrowers wishing to borrow money to purchase a property who are self-employed and are unable to prove their income using traditional verification documents, including up to date tax returns and financial statements.
What to look out for
Because low doc loans are considered as high-risk lending, lenders charge higher interest rates, fees and place various restrictions on the loan.
- Interest rates: Rates may vary between 1% to 3% higher than a standard home loan and will depend on a number of criteria, including loan to value ratio’s (LVR), income verification documents and loan purpose.
- Lenders mortgage insurance (LMI): LMI is payable if you borrow over 60% of the property value compared to a standard full documentation loan where LMI is payable for loans exceeding an 80% loan to value ratio (LVR).
- Deposit: A larger deposit is required because lenders do not offer loans exceeding an 80% loan to value ratio (LVR) and as per the point above lenders mortgage insurance (LMI) is payable above 60% LVR.
- Length of business tenure: Most lenders will require you to have an ABN that has been GST registered for 2 years, however, there are some lenders that only require a 6 month ABN registration.
- Credit file: Due to the increased risk associated with this form of lending, the bank is going to want to see that your credit history is in excellent order and that your current debt obligations have been paid on time. There are options to go with lenders who provide low docs loans if you have a poor credit history, however, the interest rate charged can be quite high.
- Maximum loan Amount: Most lenders have a maximum loan amount of $2m. While a small number of lenders allow loans greater than $2m and are on a case by case basis.
Types of income verification
Under the National Consumer Credit Protection Act (NCCP) lenders are required by law to have some sort of income verification from you before they can approve your mortgage. You will therefore need to substantiate your income with supporting documents, below is a list of supporting documents that can be used.
- BAS statements: 12 months of Business activity statement (BAS) is the general requirement to verify your business turnover
- Accountants letter: An accountant letter verifying your income
- Expired tax returns: Old tax returns, which are over 24 months old
- Company bank statements: Bank statements are used to verify the amount of sale proceeds being deposited into the company bank account
- Interim financials: If they are available, the lender may ask for a copy of the business’s interim financial statements, which can be used verify income
To speak to our expert mortgage brokers to see if a low doc loan is right for you please call 02 9934 9735 or