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[MoreMore Insights] Low-Doc Home Loan



What is Low-Doc Home Loan Application?


Loan approval requires borrowers to provide their income proof to confirm their repayment ability. Normally to apply for a loan, PAYG applicants need to provide payslips and the self-employed applicants need to provide company tax return documents. But there are some self-employed clients and small business owners who are unable to provide complete documentation so that they are hard to get a loan approval.


Therefore, the low-doc loan product aims to help those self-employed applicants who do not fit in major banks' lending policies to get a loan successfully, whether they lack required documents or their documents do not meet the criteria. As low-doc loan applications require less income documentation. Meanwhile, lenders often regard these loans as high risk transactions. As a result, interest rates on low-doc loans are usually higher, and there are more restrictions in terms of LVR and loan incentives.



People Eligible for Low-Doc Loan


Many self-employed applicants are unable to get a loan approved when their income is affected by seasonal business operation or pandemic, which significantly reduced their borrowing capacity. If business tax returns are not up to date, or if financial records are incomplete, then they are not meeting the lending requirements. Also, as the self-employed applicants are somewhat flexible in dealing with their tax benefits, some documents may not truly reflect their income and financial situations. In these cases, a low-doc loan is the best solution. Unlike standard lending process, low-doc loan does not require the applicants to provide last two financial years of company financial statements, company tax returns and individual tax returns. Lenders only require one accountant letter to explain the income in most cases.



Pros and Cons of Low-Doc Loan


When applying for a low-doc loan, self-employed applicants with more than 2 years' ABN can submit the application to obtain the loan in the shortest time. It also saves a lot of trouble in terms of documentation. However, it is important to note that in addition to the higher interest rate for low-doc products, most lenders charge a percentage of the loan amount as risk fees when the LVR exceeds 70%. This type of loan requires applicants to have a larger deposit, and that a third party (such as parents) cannot guarantee the loan and that the lender may not accept the remote or hard-to-sell securities.


Low-Doc Loan Summary


Please be mindful, that there are no physical branches for the lenders that can provide low-doc loans. So all the low-doc loan applications need to be lodged via mortgage brokers. Although the low-doc product selection is limited, it is still necessary to carefully compare the options available and choose one with a lower interest rate and fees, which can often help borrowers save a large amount of money. Before applying, borrowers should firstly identify the documents they need to submit, and learn more about lending institutions or products with experienced mortgage brokers, as well as confirm the loan amount and repayment amount. If the income fluctuates over a period of time, applicants need to give the lender a reasonable explanation so they can have a chance of being accepted for the higher income. Finally, it is important to prepare all application documents as early as possible to leave enough time for the broker and lender to process, so as to reduce unnecessary risks and obtain the loan as early as possible.


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