Is Home Ownership Possible with a Low Doc Home Loan?
Low doc home loans are made available to help potential home buyers purchase a home of their own, even if they can’t provide all the required documentation which proves regular earnings that lenders traditionally require.
How a Low Doc Loan Application Differs
Most lenders need an applicant to produce evidence of earnings such as employee pay slips and taxation returns, but if you are a small businessperson or self employed in some other way, such as a casual worker or contractor, you may not always be able to produce up to date taxation returns and will obviously have trouble coming up with a pay slip from your employer.
Low doc home loans are a way for self employed borrowers to get around this rigid criteria, although it is still necessary to provide some sort of verification of your earnings, and in a low doc application this is usually in the form of self verification of your income.
If you are a home buyer who cannot comply with the normal mortgage application requirements you will also usually have to convince a potential lender that you have some existing equity or a larger deposit than that required from conforming borrowers. People who may have a bad credit history but have sufficient security in other areas can also convince a lender that if any default was to occur the lender’s principle loan amount could still be reclaimed.
Despite lenders using self verification and equity assessments, low doc home loans remain abused by some people who do actually have a sufficient regular income to enable them to be successful in achieving approval under the usual requirements, but have failed to declare this income to the taxation department. This is of course illegal and if the true financial circumstances of the borrower are uncovered they can face severe penalties.
If a low doc home loan is the only opportunity you have available to you to obtain sufficient finance to purchase your own home, you should make sure you weigh up the costs involved before you apply. The exact additional costs will depend on the loan provider but low doc home loans often attract a higher interest rate, and require you to pay for lenders mortgage insurance (LMI). Most low doc home loans will only allow you to borrow 80% of the value of the property, to keep your loan to vale ratio low, and reduce the risk for the lender if they need to sell the property and recoup their losses on default. Although, if you can come up with more evidence of a regular and stable financial situation, you may be able to convince your lender to lend you more.
The Three Main Types of Low Doc Home Loans
There are three main types of low doc home loans and they all differ slightly in their eligibility requirements, for example:
- Self declared income is the most common low doc home loan handled by the lenders who specialise in non-conforming mortgages. In this type of loan the home loan provider usually offers a mortgage in return for a signed declaration of income. There is not normally any other accompanying evidence required. In this case though, the LVR is restricted to 80 percent and the interest rate will be higher than that of other low doc home loans.
- Account statement is similar, but more substantial income evidence is required, usually a letter from your accountant. The interest rate charged for this type of low doc home loan is more likely to be in line with that of a standard home loan.
- Asset lend is a low doc loan that requires the least amount of evidence to prove earnings. In some cases no proof of income is asked for at all. This type of mortgage is purely secured on the value of the property being put up as security for the loan. You will have to pay a substantially higher interest rate and you will be allowed a lower LVR than the other two types of low doc loans.
Low Doc Home Loans Conditions
Most low doc home loans contain certain conditions, the main ones to look out for will be the following:
- The higher interest rate. A good mortgage broker can often undertake some negotiations here on your behalf and have the higher rate reduced or even brought directly in line with standard home loan products.
- Additional fees and charges that are not applicable to other standard mortgages.
- Lenders mortgage insurance (LMI) payable on a lower LVR. For example, if you provide a 20% deposit on a standard home loan you don’t usually need to pay LMI, but a 20% deposit does not negate the need for LMI on a low doc loan because it is still high risk lending.
- A higher than normal deposit. Usually no less than 20 percent.
- Additional security such as your car or other investments.
- A shorter loan term. Sometimes as short as one year.
Low doc home loans are mostly offered by specialist mortgage providers, although many of the larger lenders are now offering a limited range of such loans. As there is a higher risk of fraud, low doc loans require a higher deposit so that a lender has a greater degree of security. Higher deposits are a good indication that the loan will be repaid, and they also offer better security against a default.
Contact Home Loan Finder now to find out which Australian lenders are offering the best low doc home loan deals.
Related posts:
- Home Loan Deposit
- Home Loan For People With No Payslips
- How does your Property work as Security for a Home Loan
- Home Loan For People With Regular Overtime Income
- How To Refinance A Low Doc Loan For A Home Loan
- eMoney 3 Year Fixed Rate Home Loan
- No Deposit Home Loan – An Option For First Home Buyers
- eMoney 2 Year Fixed Rate Home Loan
- 95% Loan to Value Ratio Loans for Your Home
- No Doc Home Loans
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