A low doc home loan is a mortgage with fewer financial documents than a traditional home loan. It’s perfect for Australians who work for themselves and any individual who doesn’t have conventional payslips and financial statements preferred by lenders.
As a sole proprietor and a freelancer, one doesn’t have to meet conventional lending requirements, which require two years of tax documents, detailed profit and loss statements, and a demonstration of consistent income.
That’s when a low doc home loan comes in useful. It’s key to homeownership when one can’t present conventional forms of documentation desired by financial institutions. In this article, we’ll break down:
- What Low Doc Home Loans Are
- Its Function
- Who These Loans Are Best For
- Application Tips
What are Low Doc Home Loans – Australia
In Australia, most lenders carefully check your earnings when estimating your lending capacity. They prefer seeing your work record, your wage or salary, and any additional sources of earnings.
Sole proprietors or freelancers often don’t have this and could have an ABN and irregular sources of earnings instead – even receiving bulk payments throughout the year rather than a monthly wage.
That’s where low doc home loans step in. Instead of requiring full financials, these loans employ alternative proof of income, such as:
- Business Activity Statements (BAS)
- Bank Statements
- An Accountant’s Letter Verifying Your Income
Lenders realise that many business owners and freelancers don’t have traditional pay slips on file and may have variable monthly cash flow. A low doc loan allows you to demonstrate your income in other ways, which makes it simpler to become a homeowner.
That said, low doc loans typically involve a more detailed examination of your overall profile. Lenders still want to know you have a good history, so they might request a longer history of self-employment, a big deposit, or a strong asset base. The lender assumes more risk, so interest rates on low doc loans are slightly higher than on traditional variable or fixed-rate mortgages.
Advantages and Disadvantages of Low Doc Home Loans
Like any financial product, low doc home loans have pros and cons:
Advantages
- Easier Access for Self-Employed: If you lack traditional proof of income, a low doc loan might be your best path to homeownership.
- Flexible Assessment Criteria: Lenders accept a range of documents to verify your income, which allows you some flexibility in documenting your earnings.
- Potentially Faster Approval: Sometimes, you avoid the time-consuming back-and-forth of supplying two years’ worth of tax returns, although this isn’t always the case.
Disadvantages
- Higher Interest Rates: Lenders view low doc loans as riskier, so they charge a premium on the interest rate.
- Larger Deposit: Some lenders require a larger deposit (typically 20% or more) to compensate for their risk.
- Stricter Conditions: Expect stricter approval terms, such as a minimum trading period of years under your ABN or restrictions on types of property that can be bought.
Who Can Obtain a Low Doc Home Loan?
Low doc home loans don’t have a one-size-fits-all qualification list, but lenders will require that you tick a few boxes:
- Self-Employed History: Show a trading history of one to two years. If you are new to being self-employed or have a new entity, lenders will require additional paperwork or reject your application until an established model for your earnings is in place.
- Good History: Lenders will overlook minor defaults and credit issues, but your credit file will work best for you with a solid record. With a perfect record, your lenders will assign a preferential price tag for your preferred lending terms. With a less perfect record, a specialist lender will grant your application, but with additional fee payments and possibly a high-interest price tag.
- Sufficient Equity or Deposit: You will need a deposit, which can range between 20% and 40% of your property price, depending on your financial record and your lending institution. Higher deposits mitigate lenders’ level of risk and save dollars with a reduced interest price tag.
- Proof of Earnings: Although you do not have to present traditional pay slips, you will need to present a combination of your BAS, bank statements, and accountant’s affirmation.
How Do I Apply for a Low Doc Home Loan?
The application starts in much the same manner as any traditional mortgage. You choose your property to buy, then go and pay a visit to a bank, or a mortgage broker, and notify them in advance that a low doc option is of interest to you. The lending institution will then notify you of documentation requirements.
Once your documents reach them, your application will be lodged. The lender or broker will then assess your information and either grant, conditionally approve, or reject your application.
They may seek additional information if they have to have high confidence in your financial position. After that, it’s a matter of signing your settlement and agreement for a loan.
Tips for Getting Approved
- Show Consistent Deposits: Lenders prefer a picture of consistent deposits in your bank account. With variable earnings, consistent earnings over a six to twelve-month period puts your application in a positive position.
- Keep a Healthy Credit Rating: Make your monthly and credit card payments early to avoid a poor credit record. Having a healthy credit rating puts you in a strong bargaining position when it comes to negotiations over your interest rate.
- Save a Higher Deposit: The larger your initial payment, the safer your lender will feel. Saving a big enough deposit can secure a reduced rate and reduce lenders’ mortgage insurance (LMI) requirements.
- Use an Expert Broker: In case your approval opportunity isn’t high, a low doc experienced broker can help out. They understand who will most probably have your application approved. At Upscore, we connect you with a vast range of expert brokers easily to simplify your homebuying process. Utilise our FinancePassport to get started.
- Keep Complete Records: Even though this a low doc product, record keeping is still important. Bank statements, current BAS, and a letter from your accountant can make your application stand out.
Is a Low Doc Home Loan Right for You?
Low doc mortgages are for buyers who can not meet the requirements for a conventional residential mortgage. If you’re a sole trader with unpredictable income, or just have a desire for a quick approval without providing several years’ worth of financials, then a low doc mortgage is an option worth exploring.
On the downside, consideration must go towards the added expense. Higher interest and possibly larger deposits could make such a mortgage much more costly over time.
You must also consider long-term planning. If your earnings become predictable or you can produce full documentation in the future, then it may be best to refinance into a conventional mortgage and possibly lock in a reduced price. Always remember to balance the ease and availability of a low-doc mortgage with such added expense and stricter terms.
Conclusion
Low doc mortgages have a role for sole traders and many Australians with less conventional lending profiles. They’re a big part of the mortgage marketplace for the simple fact that not everyone earns a simple wage. With enough cash flow to service monthly payments but no conventional financial documentation, such a mortgage can make homeowners a reality.
