What Is A Low Documentation Home Loan?
A low documentation home loan, also known as a low doc or lo doc loan, is a type of loan where the applicant does not have to provide full evidence of their income.
Low doc home loans are designed for self-employed people who may not have up-to-date financial records, and cannot prove their income as easily as a salaried employee can.
Low doc home loans first started gaining popularity during the late 1990s and early 2000s. Initially these loans were only available through non-bank lending institutions who marketed them via mortgage brokers, however in time the mainstream banks started to see the appeal of low doc loans and developed their own products.
The popularly of low doc home loans grew strongly during the real estate and property boom of the early to mid 2000s, however with the arrival of the Global Financial Crisis in late 2007 and the reduced access to funding for the non-bank lenders, low doc lending started to reduce.
How Does a Low Doc Loan Work?
Traditionally home loan borrowers have had to provide evidence of their income in order to obtain a mortgage. For salaried employees this is generally quite easy, as they can provide copies of payslips and PAYG summaries.
For self-employed applicants it is not so easy. These applicants must supply business and personal tax returns for the last two years, which in many cases is not easy for a self-employed person.
A low doc loan enables the applicants to instead provide a signed declaration stating what their income is, or what they expect their income to be over the following twelve month period.
Provided that the applicant has an overall financial position that appears consistent with the income they are declaring, and provided that they meet all other lending criteria, the lender can approve the home loan application without sighting any evidence of income.
Although low doc mortgages have made it much easier for self-employed applicants to take out a home loan, there are a few restrictions in place that must be considered when taking out such a loan.
Whilst traditional home loan applicants may be able to purchase a home with as little as five per cent deposit, a low doc applicant will generally have to provide a minimum twenty per cent deposit. The larger deposit amount provides added security for the bank when lending to low doc applicants.
Low doc loans can also have added restrictions when it comes to refinancing and taking part of the loan proceeds in cash. These restrictions vary from one lender to the next, so it is worth researching which lender will suit your requirements best.
As with most home loans made to self-employed persons, the applicant will generally need to have been in business for at least two years prior to applying for the loan.
Low Doc Interest Rates
Due to the nature of low doc loans they are generally considered to be a higher risk to lenders when compared to traditional home loans. For this reason the lenders must charge higher interest rates to cover the potential increased risk.
Interest rates for low doc loans can vary significantly between the different lenders, so it is certainly worthwhile shopping around to find the best deal for your situation.