Low doc home loans
Low doc loans are designed to assist people who do not qualify for a traditional home loan to buy a property. Low doc (or low documentation) loans still require the application to be made in writing, however you may not be required to provide much of the paperwork that is necessary with standard home loans, such as proof of income, assets or liabilities. The low doc loan relies more on a method called self-verification, where you state your income without the verifying documentation.
Who can benefit from a low doc loan?
Low doc loans are designed to benefit those people who have some existing equity or a deposit saved, and have trouble showing evidence of regular income. This could apply to the self-employed or casual workers. Low doc loans could also be made available to people with a bad credit history.
Low doc loans are also sometimes abused by people who have income they have omitted to declare to the taxation office. Failure to declare taxable income is an offence and, if caught, offenders are forced to pay penalties that far outweigh the savings they intended to make by breaking the law.
Why should I take out a low doc loan?
If you fall into any of the categories above and wish to purchase a property, a low doc loan could be your only option for obtaining the required finance. As with any major financial decision, always weigh up the pros and cons and determine whether you can afford the repayments. There could also be extra costs involved as many lenders will charge an inflated interest rate when standard documentation is not produced on application. Mortgage insurance is also a standard requirement with low doc loans, which adds further to the cost.
Most low doc loans will cover up to 80% of the value of the property (80% LVR), although the more financial documentation you can present to the lender, the higher the percentage could be.
Types of low doc loans
There are three main types of low doc loans: self-declared income, account statement and asset lend. Each of these low doc loans have slightly different eligibility requirements.
Self declared income
The most common low doc loan, where the lender will offer a home loan on a signed declaration of income, with no accompanying evidence. In general, 80% of the property value is loaned and the interest rate can be higher than a standard loan
Requires more substantial income evidence, such as a letter from your accountant, however interest rates are usually more in line with a standard home loan .
This type of low doc loan requires the least evidence to be presented, in some cases no proof of income or signed declaration is needed. The loan is secured purely on the value of the property. These loans have substantially higher interest rates and, in general, a lower percentage of the value of the property can be borrowed.
What to look out for
Low doc loans generally have certain conditions and extra costs attached, such as:
- higher interest rate, although the more financial documentation you can produce, the lower the rate often is.
- additional and inflated fees and charges.
- compulsory mortgage insurance.
- higher deposit is required. Often up to 20% of the property value needs to be provided by the purchaser.
- added security could be required, such as a car or other investments.
- a shorter loan period. Some loans require the applicant to refinance after a set period of time, sometimes as short as 1 year.
Low doc loans are not suitable for everyone and the potentially higher fees and charges could be financially detrimental. But if a full doc loan isn't an option for you, then a low doc loan could be the solution if you need a loan and are confident in your ability to be able to repay it.