Low Doc Home Loans

Potential borrowers who can’t supply the documentation to satisfy a lender’s criteria for a standard home loan may be able to get a low doc loan. For example, your business (and your income) may be growing, enabling you to meet the mortgage repayments you’ll need to make for the home loan you want. But this increase might not be reflected yet in your most recent financial statements or the tax return that you have available at the time of your home loan application. Many businesses that generate significant revenues employ creative accounting practices in order to minimise their tax liabilities – however, this in turn can limit a borrower’s ability to obtain a standard home loan.

In these circumstances, a low doc loan may be your only option. Be aware though that you’ll still need to convince the lender of your ability to make the repayments. That will be easier to demonstrate if you have a sound credit history (i.e. you have met your repayments on previous loans or on your credit cards) and if you prepare a realistic budget of your weekly/monthly revenue and expenses.

Different lenders will have different loan-to-value ratios (LVRs). This LVR figure represents the amount you need to borrow expressed as a percentage of the value of the home you wish to buy. For a standard home loan, the LVR is usually 80%, though it varies by lender. The LVRs for low doc loans typically range from 60% to 80%. The higher the LVR, the higher interest rate the lender will usually charge to compensate for the increased risk.

Under Australian consumer credit protection legislation, lenders are legally obliged to comply with responsible lending provisions. This means that they must lend responsibly by accurately assessing your financial situation and your ability to repay any loans or credit they agree to provide. Failure to comply with those provisions carries significant penalties.

Low doc home loans are viewed as higher risk by lenders. Therefore, they:

• Have a higher interest rate and associated fees compared to standard home loans
• Usually require a higher deposit
• Usually require you to take out mortgage insurance if the loan value ratio (LVR) is greater than 60%. Loan mortgage insurance helps to protect the lender if you’re unable to make your future repayments.

In addition, it may be more difficult for you refinance your low doc loan in the future if your circumstances change, compared with a standard home loan. If you’re stuck on a low doc loan with a high interest rate, this can be costly.

Low doc loans allow you to use a variety of alternative ways to prove your income. Calculating your likely income if it fluctuates is obviously a very important part of their assessment. For a low doc home loan, you can provide items such as:

• A signed declaration declaring your income. It’s important that this declaration is accurate and realistic for your age and occupation, considering all the current and future potential circumstances of your business.
• Business Activity (BAS) Statements for the past 6 or 12 months or more (ideally showing increasing turnover/revenue/profits). Many borrowers will limit your maximum LVR without these statements.
• Your business and personal tax returns.
• Your business bank statements. Ideally this should demonstrate the regular and positive cash flow of your business.
• An accountant’s letter verifying your income claims.
• The most recent financial statements for your business (ideally prepared by an accountant). For example, profit and loss statements and a balance sheet showing your business’s assets and liabilities.

The more of these you can provide that show evidence of high turnover (and income) for your business, the better. Lenders tend to view self-employed people as a higher risk and they are more conservative in their lending practices with them.

Some self-employed people are asset-rich but cash poor. Lenders will need to see evidence of your regular, positive cash flow to be confident that you will be able to meet your loan repayments. It’s also good for them to see evidence of assets that your business has built up over time. It shows that you are reinvesting in your business and that you intend for it to be around for a long time. A rule of thumb is that your business assets should be equal to two times your business income, though this will vary by the type of business.

If you’re self-employed, you’ll have an Australian Business Number (ABN) and will most likely be registered for GST. In Australia, it’s compulsory for businesses with an annual gross income (i.e. turnover) of more than $75,000 to register for GST. Most lenders will want to see evidence that your business is a viable ongoing concern by having your ABN, GST registration and associated financial statements for a period of two years or more.

Not all lenders provide low doc loans and the ones that do have different lending criteria. For example, they’ll have different minimum documentation requirements and different maximum LVRs. Their interest rates and associated fees will also vary accordingly.

In general, even with a low doc loan you need to provide as much verified information as you can to increase your chances of approval. But you need to make sure that the information you supply is well-presented, accurate and fully supports your ability to make the loan repayments. We can help you to do this.

The location of the property you want to buy will also be a key consideration for the lender. A property in a desirable location isn’t as high a risk for the lender, even though they may perceive you to be a higher risk as a low doc home loan applicant. Well-maintained homes in capital cities will tend to be viewed more favourably by lenders than those in more isolated, regional locations that may be more difficult for them to sell if you were to default on your mortgage repayments.

Your credit history is important with any application and a low doc home loan< is no different. Lenders can check with credit reporting agencies to see if you or your business have a good record of repaying credit. The best way to develop a good credit history is to pay your bills on time. Under Australian legislation you are entitled to contact a credit reporting agency to access your own credit report. You also have the right to have any errors on your report promptly corrected by the credit provider.

Collateral security includes assets you can put up as security against the home loan. These may be required by a lender if your LVR is high. Property is the most preferred form of collateral security for most lenders.

Lenders will assess your overall level of debt as part of their evaluation of your ability to repay the home loan you’re applying for. As part of their responsible lending legal obligations, they need to ensure you’ll be able to meet your repayments. This includes any other debts you may have, (e.g. business-related debt). Most lenders have maximum levels of debt exposure they are prepared to accept from low doc home loan applicants.

If you’re applying for a low doc home equity loan, most lenders will require proof of what the funds will be used for, especially if they’re being provided directly to you. Their concern would be that the funds may not be used for income-producing or asset-building purposes, making you a higher risk borrower for them.

'No doc’ loans are as their name suggests. They require no documentation or proof of income. If you can secure one, you’ll usually only be required to sign a declaration that you can afford the loan repayments.

But lenders are still bound by their legal responsible lending obligations, making the approval of a no doc home loan more unlikely unless you are very well known to them. And if you do get one, it will typically be at a very high interest rate.

You would be far better off applying for a low doc loan with a comparatively lower rate. If you can genuinely afford the low doc loan repayments, your application will usually be approved by the lender.