Low Doc & Lite Doc Loans
Not every Australian can be approved for a standard home loan. Some clients only have Low-doc and Lite Doc home loans as their best alternative – primarily self-employed individuals, small business owners, contract workers, and others who may not have access to the typical documentation banks require.
Low doc and Lite doc loans, or “low documentation” home loans, are a viable choice as they cater to borrowers who are not in the traditional employment space.
Let’s talk about low-doc home loans, how they work, what to provide so lenders approve your application, and their potential benefits and pitfalls.
What is a low-doc home loan?
Low doc loans, short for low documentation, are mortgage products specifically designed to finance home buyers with difficulty providing standard income verification documents generally required when applying for a traditional home loan.
Non-bank lenders first introduced low-doc home loans during the 90s to fill the need in the real estate industry. These loans offer an alternative path to homeownership for self-employed people, freelancers, entrepreneurs, and those with irregular income streams who do not have PAYG (pay-as-you-go) income.
Nowadays, only select lenders will have low-doc loans for home buyers, and those that do offer them will require higher interest rates and a sizeable deposit, usually more than 20%.
Mortgage brokers figure largely in low-doc home loans because they are the ones who assist in navigating how non-traditional clients can prove their ability to make mortgage repayments.
What about a lite-doc home loan?
A lite-doc, or a non-conforming home loan, is somewhat similar to a low-doc mortgage, but there are slight differences.
Lite doc home loans are meant for home buyers who wish to secure a loan even with little to no credit history, or those who have more adverse histories than the average mortgage applicant.
Ideally, you can demonstrate an ability to repay mortgage through a good credit score and proof of income. However, not every borrower has the luxury of time to address their unique financial circumstances and credit challenges before buying a home.
This is where the lite doc home loan category comes useful. Lenders are more flexible in accepting alternative documentation, e.g., beyond standard income proof and credit scores – as long as you are able to demonstrate enough repayment capacity through business statements, accountant declarations, then it’s possible to secure an approval.
How much can I borrow on a low-doc or Lite-doc loan?
Self-employed or small business owners could borrow at most 60% -70 % of the property value. Home loans that are higher than this will have to pay the one-off premium Lenders Mortgage Insurance (LMI).
Of course, low-doc home loans are assessed on a case-by-case basis, so if you have a strong income or have been running the same business for years, you are likely to be a trustworthy borrower with a higher loan-to-value ratio (LVR) than someone self-employed for only a year or two.
Take note that along with the principal amount and interest rate, a low-doc or lite-doc home loan requires added fees such as a risk fee. Because of higher risks, clients should devise an exit strategy to improve their position and potentially switch to more conventional terms in the future.
What documents do lenders need?
Low doc loan providers recognize that clients often have fluctuating income streams. The National Consumer Credit Protection Act (NCCP) Act requires lenders to get a borrower’s income verification proof before approving them for low doc home loans.
Here are the main types of documents that can help verify your income:
Low documentation declaration – Borrowers will need to complete a low documentation declaration form provided by the lender. This declaration confirms that the borrower is self-employed or has non-traditional income sources and acknowledges the reduced documentation requirements.
Business Activity Statements (BAS) – For self-employed individuals, providing BAS statements is common. These statements are typically issued by the Australian Taxation Office (ATO) and show the business’s income, expenses, and Goods and Services Tax (GST) liabilities. Lenders may request several BAS statements, usually covering the last 12 to 24 months.
Bank statements – Lenders often require bank statements of at least 12 months to assess the borrower’s financial position and cash flow. These statements can help verify income deposits, regular expenses, and overall financial stability. Providing statements for business and personal accounts may be necessary.
Accountant’s letter – Some lenders may request an accountant’s letter or declaration. This document, prepared by a certified accountant, confirms the borrower’s income, financial position, and business stability. It provides additional credibility to the borrower’s financial profile.
Business registration – Business owners or company directors may need to present evidence of business registration or company documentation, such as an Australian Business Number (ABN) or Australian Company Number (ACN).
Asset and Liability Statements – Lenders may ask for a statement of the borrower’s assets and liabilities, including any existing properties, investments, or outstanding debts. This provides a comprehensive view of the borrower’s overall financial position.
Since requirements can vary among lenders, working with a mortgage broker or a loan specialist can help you navigate the specific documentation requirements of different lenders and ensure you provide the necessary paperwork to support your low doc loan application.
Am I qualified for a low-doc or a lite-doc home loan?
Low doc home loans cater to those who may struggle with standard home loans, but just because you have an ABN and irregular income source does not mean you automatically qualify for a low doc loan.
You have to prove that you have a well-established business, belong in the same industry for a couple of years, and have a steady cash flow.
In addition, some lenders look at a balanced asset-to-business ratio. For example, earning around $100,000 annually would mean about $200,000 in net assets.
Remember that low-doc loans have helpful features, like fixed rates, lines of credit, and more, but they won’t have other important features either. There are no third-party guarantors, introductory rates, repayment holidays, or security substitution.
Mortgage applicants must be able to provide the necessary documents to qualify for a low doc loan. You may call our mortgage brokers to enquire about what you need to prepare to cross your t’s and dot your i’s.
Talk to our low-doc home loan specialists
If you are considering a low-doc home loan, nothing beats consulting with our mortgage brokers. Before making crucial decisions, we assess your financial circumstances and advise you about the most suitable loan products available.
Remember, low-doc home loans have higher interest rates. With our expertise, you can always compare lenders’ terms, refinance, and make astute finance moves based on your unique mortgage needs.
