Getting a home loan can seem daunting if you're self-employed or low on documents. Here we'll explain what a low doc home loan is, what documentation is required, and how you can get approved for a low doc home loan.
A low documentation (hence the name “low doc”) loan is designed for individuals who are unable to provide the full two years of tax returns and financial records required for a standard home loan application. Low doc loans mostly cater to self-employed borrowers or investors who have not yet filed their tax returns or are unable to meet the requirements of a full doc loan.
Read our complete guide to home loan deposits.
A low doc loan uses a self-verification process to confirm income details. Essentially, the borrower signs a declaration document outlining their earnings and where they come from. This means that if you’re just starting out as a freelancer or tradie, you don’t have to come up with lots of income statements.
This type of home loan is well suited to borrowers who have a combination of assets and income, but aren’t able to provide normal paperwork such as tax returns or financial statements.
Low doc loans are also suitable in situations where tax returns are yet to be completed, or are out of date, so alternative documentation (such as BAS statements) is provided as a better reflection of current conditions.
Individuals who apply for a low doc home loan are self-employed, freelancers or investors who don’t have a regular job where they are being taxed on PAYG income.
A low doc loan offers a lot of flexibility. If you’re a freelancer, consultant or contractor, then you might be the perfect candidate for accessing a low doc home loan.
While you don’t have to provide all the usual documentation like you would on a standard home loan, there are still some documents that lenders typically require. These include:
Self-verification via income declaration form
Recent business activity statements (BAS)
Your ABN and/or registered business name
GST registration details
Letter from accountant clarifying your financial position
Not sure if you have all the documentation required? Chat with a Lendi Home Loan Specialist.
Bob has been running his plumbing business for 5 years. He and his wife have been thinking about buying an investment property.
They’ve done some online research and think that a low doc home loan is a good option for them, but their local bank branch say they don't have any suitable products for them.
They visit Lendi online because of they offer choice of over 35 lenders. They quickly get confirmation that they are eligible for a low documentation home loan and get the ball rolling.
Bob completes an income declaration form and provides his last 6 months worth of BAS. Within days Bob and his wife are pre-approved for a $350,000 home loan and start property shopping immediately.
The main differences between a low documentation home loan and a standard home loan application can include:
Larger deposit requirement for low doc applicants. Lower LVR, meaning you might only be able to borrow up to 80%, which means a higher deposit requirement
A higher interest rate might be charged, depending on the lender
No company financial reports or tax returns are required as they would be in a standard home loan application
Some lenders will restrict postcodes you can purchase in with low-doc options
One of the key things you should look at when considering this type of home loan is understanding how much of a deposit you might need before starting the application process for a low doc home loan. Chat with a Lendi Home Loan Specialist today to find out how much deposit you might need to provide.
Lenders Mortgage Insurance can be required for loans when borrowing over 60%
You may need a larger deposit
You might not qualify for a low interest rate home loan
A risk fee may apply
Look out for extra LMI criteria. For low doc loans, Lenders Mortgage Insurance is usually applied if you borrow over 60% of the total purchase price.
Borrowers usually need a higher deposit. Most lenders will require at least a 20% deposit for low doc home loans.
You’ll need documentation to verify your income such as an accountants letter or bank statement.
The majority of lenders will also require an ABN that has been GST registered for two years, however some lenders are lenient on this requirement.
Have a good asset to income ratio. A very good ratio is considered to be 2:1. So if you earn $100,000 you should aim to have $200,000 in assets.
Clean up your credit file
Not all lenders are equal when it comes to low doc home loans, so if you’re self-employed or have a unique set of circumstances, finding the right lender will ensure that you don’t have any issues in the future. Use a good Home Loan Specialist to help you with this or start your search here.
Lenders will always assess your taxable income. The higher this figure, the better, when it comes to calculating your borrowing power. Chat to your accountant and have them prepare a special report for your low doc home loan. They won’t need to see your ‘paper losses’.
Make sure you know what your credit score is and be prepared to explain any recent credit history entries. Your credit score will play a large part in the approval process, so make sure it’s in good standing order.
Make sure your savings records have a solid 3-month history of regular and consistent deposits.
If you’re signing an income declaration and fudging the numbers a little, you could find yourself in hot water come tax time. The reason for this is the ATO may choose to use this declaration as the basis for your tax return. Be honest in your disclosure to avoid any future issues arising.
Read our complete guide to offset accounts here.