Low Document (Low Doc) Home Loans
For many years now in Australia, one of our more common specialist products has been the Low Document (or Low Doc) home loan. Initially, it was only non-bank lenders who were offering these types of loans and traditional banks only decided to include Low Doc loans in their range of lending products when they started losing market share in this area.
Low Doc loans fell out of favour to a certain degree during the global financial crisis, but the Low Doc loan has slowly returned as confidence has been restored. Probably the major difference between Low Doc lenders and mainstream lenders is that lenders of Low Doc loans don’t demand the typical proof-of-income documents, such as company financial statements and/or tax returns. They have Self-Certification instead, which basically means that a borrower confirms they are capable of servicing the loan by completing a declaration.
Low Doc Loans: Ideal for Full-Time Investors and the Self-Employed
Low Doc loans are especially attractive to self-employed people or full-time investors who may have difficulty showing a high level of income due to (perhaps) a delay in lodging their tax returns, writing off a number of expenses, or reinvesting profits into their business. The Director of Club Financial Services, Andrew Clouston, believes that: ‘Low Doc loans are an ideal product for self-employed people – people who have assets and income but at the time of application are not able to produce the required tax returns or financial statements.’ He added that: ‘Borrowers should be aware that fees and interest rates are higher with Low Doc home loans. In addition, Lenders Mortgage Insurance fees are often applicable: these are generally capped at 80% of the valuation of the property’.
Lenders Mortgage Insurance
Lenders Mortgage Insurance is actually one of the key components of a Low Doc home loan. This type of insurance protects the lender against any loss in the event that the borrower should default on the loan. Traditional loans typically only require Lenders Mortgage Insurance if the borrower is applying for more than 80% of the value of the property; whereas Low Doc loans require lenders mortgage insurance if the borrower is applying for more than 70% – in some cases it’s 60%.
Borrowing Tips for Low Doc Home Loans
In order for a borrower to be granted a Low Doc home loan, there are three main requirements that must be satisfied –
- The borrower is required to Self-Certify their income to the satisfaction of the lender;
- The borrower must show a clean credit history and have an excellent repayment record for existing or previous loans;
- If applicable, the borrower is required to confirm their self-employed status; which can be done with a registered ABN or an accountant’s letter.
Low Doc borrowers should understand that, in Australia, there are only two mortgage insurers, which means that any income declared to one lender could affect future applications with another lender or mortgage insurer. Should the income declared on different applications show substantial discrepancies, this would be questioned by the mortgage insurer.
Any potential borrower who is credit impaired should still approach lenders offering non-conforming Low Doc products because they may well qualify. Then, providing the borrower is able to provide verification of traditional income, the majority of Low Doc lenders will generally be happy to switch the borrower to a Full Doc product – and at no cost to the borrower.
Low Doc and Non-Conforming Home Loans
It’s up to you, the borrower, to understand the difference between Low Doc and Non-Conforming loan products. Both of these types of loans waive the lender’s requirement of viewing and retaining the applicant’s tax returns and financial statements; however, for borrowers who are mortgage insured, who are not applying for more than 80% of the property’s value, and who have an unblemished credit history, Low Doc loans are almost always available.