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.
Low doc lending in recent years has tightened up considerably and most of the majors no longer offer this type of lending. You will need to speak to one of our mortgage brokers, who will be able to find the right lender for your circumstances with the most competitive rates and fees.
What to look out for
Because low doc loans are considered high risk lending, lenders charge higher interest rates and fees and also place a number of restrictions on the loan.
- Interest rates: Rates can be anywhere from 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 use
- Lenders mortgage insurance (LMI): LMI is payable if you borrow over 60% of the value of the property versus a regular full doc loan where LMI is payable over an 80% loan to value ratio (LVR).
- Deposit: A larger deposit is required because there are no lenders who will let you lend above an 80% LVR and as per the point above LMI is payable above 60% LVR.
- Length of business tenure: The majority of lenders will require you to have an ABN that has been GST registered for 2 years.
- Credit file: Because this type of lending is higher risk the bank is going to want to see that your credit file 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 very high.
- Maximum exposure: Most of the lenders have a maximum loan amount of $1m. A small number of lenders allow loans greater than $1m 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 BAS statements is the general requirement to verify sales 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
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