Home loan approval might seem challenging if you’re self-employed or have few documents. We’ll provide everything you need to know about low doc loans, from how much deposit to the documentation required and the approval process.
- A low doc home loan is for self-employed, investors, or contract workers without sufficient paperwork for a standard mortgage.
- Low doc home loans mean less paperwork, more options, and less chance of application rejection.
- A mortgage broker can help you find the right low doc home loan for your situation.
What is a low doc home loan?
‘Low doc home loans‘ stands for low documentation. Low doc loans benefit those with limited access to the usual information banks and documentation typically required for a regular full doc home loan. For instance, self-employed borrowers may not be able to provide proof of income or sufficient employment history.
Low-doc home loans allow applicants to provide less documentation or alternative paperwork to prove their credit history.
Who are low doc home loans for?
Eligibility requirements differ from lender to lender. However, most lenders require an ABN and alternative documentation to prove your creditworthiness. You’ll also need a good credit history. Low doc home loans are usually for:
Self-employed borrowers: Business owners need to know their annual income and spare monthly cash for home loan repayments.
Investors: Investors may not have a regular income if they rely on your investment income. However, if you’re looking for a new investment property, you will need a low-doc investment loan.
Contract workers: Contract workers may receive seasonal income rather than regular income. Therefore, you may need a low-doc home loan.
Speak to a mortgage broker about whether you should apply for a low-doc or full-doc loan.
What documentation do you need for a low doc loan?
Low doc loans are precisely that, low doc, but you will provide some evidence of your financial situation. Generally speaking, lenders will accept the following financial statements
- Self-verification via income declaration form
- Recent business activity statements (BAS)
- ABN or registered business name
- Bank statements with a history of regular income
- GST registration details
- Accountant letter clarifying your financial position
Pros and cons of a low doc loan
Low-doc loans can help many borrowers buy a home, but they’re not for everybody. Here are the pros and cons
Pros of a low doc loan
Less paperwork: Those who don’t have sufficient documentation for a full doc home loan might benefit from providing less paperwork for low doc loans.
Variety of home loan options: Most lenders offer a selection of low-doc loan types, including fixed-rate and variable loans.
Less chance of loan application rejection: Loan application rejections can hurt your credit score. Financial institutions are more likely to approve your low doc loan application.
Cons of a low doc loan
Deposit: Lenders might require a much higher down payment to mitigate risk. You may also need to pay a risk fee.
Lenders’ Mortgage Insurance: If your loan-to-value ratio (LVR) is more than 60%, you might have to pay lenders’ mortgage insurance. With a full doc loan, borrowers only need to pay LMI with an LVR above 80%.
Higher interest rate: Lenders might offer higher interest rates on a low documentation home loan than on a full doc home loan.
What types of low doc loans are available?
Most lenders offer low doc loans with a range of different options, including
- Variable rate home Loan
- Fixed-rate home Loan
- Investment Loan for an investment property
- Owner-occupied home Loan
- Principal and interest home Loan
- Interest-only home Loan
- Construction Home Loan
How can I get approved for a low doc home loan?
Applying for a home loan requires gathering all the necessary documents. It’s no different with low-doc home loans; you’ll just need to provide other documentation. Here are the steps to get approved for a low-doc home loan.
- Watch out for LMI criteria; low-doc home loans typically charge LMI if your loan-to-value ratio is 60% or above.
- Most lenders will need a 20% deposit for low-doc home loans, but the more you save, the greater your borrowing power.
- Source the necessary documentation to prove your financial position, such as an accountant’s letter, tax returns, or bank statements.
- You will also need to provide an ABN registered for at least two years. However, some lenders might be lenient. Speak to your mortgage broker about ABN (Australian Business Number) requirements.
- Build your debt-to-income ratio. Generally speaking, a good balance is 2:1. Therefore, you should aim to have twice the amount of assets than net income.
- Boost your credit file. Lenders use your credit score to determine interest rates. As low doc mortgages typically have a higher interest rate than full-doc loans, you should do all you can to get competitive rates.
Ensure you only apply for low-doc home loans when you meet the lending criteria. If the lender rejects your application, your credit score may suffer.
Applying for low doc home loans
Speak to a broker with an Australian Credit Licence about applying for a low doc mortgage. You may need help applying to the right lending specialist who will consider your application favourably. A Sydney mortgage broker can also assist your application by helping you gather the proper documentation to guarantee home loan approval for your low-doc home loan.
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What is the interest rate on a low doc home loan?
Low doc home loan interest rates differ between lenders. However, they are usually higher than interest rates on full-doc home loans. You can apply for fixed-rate home loans to make interest payments easier.
What does alt doc mean?
Alt doc home loans are the same as low doc home loans. The lending specialist will accept alternative documentation to prove your ability to meet loan repayments.
How much deposit will I need for a low doc home loan?
Lenders might expect a 20% deposit for a low-doc home loan. However, to avoid LMI, you may need a 40% deposit on low-doc loans. Understand how much deposit you might need before starting the application process for a low-doc home loan.