What is a low doc home loan and how does it work?

Being self-employed or working on a contract basis can be rewarding in terms of flexibility and being able to watch your business grow, but it can come with some unique financial hurdles, not least if you want to apply to a bank or lender for a home loan.

As a general rule, many banks and lenders are reluctant to approve applicants who cannot show the kind of documents that you typically need for a home loan application – in particular, proof of employment in the form of payslips.

Even if you’re satisfied you can afford to borrow the amount you need for a home loan, banks and lenders might be cautious because you don’t receive your income in the form of a regular salary from an employer.

One alternative path to a traditional home loan is a low-documentation, or ‘low-doc’ loan. If you run your own business or are self-employed and wish to apply for a home loan, you may find that one of these loans is suitable for your needs.

It’s important, however, to be mindful of the potential downsides of low doc loans before you consider signing up for one.

What is a low-doc home loan?

Low-doc home loans are loans aimed at people who wish to purchase a home, but do not necessarily meet standard lending criteria. The phrase ‘low-doc’ is something of a misnomer, as it does not mean that you will need to provide minimal documentation; rather, it means that you will need to provide evidence of your income outside of the standard documents that lenders typically ask for.

How does a low doc loan work?

In essence, a low doc loan works in the same way as any other, in that you will borrow an amount of money from a lender and pay it back over a agreed time period, along with interest. The key difference is in the application process and the documentation you will generally be asked to provide, which will be different from a more conventional home loan.

It’s important to keep in mind that the terms and conditions attached to low doc loans are likely to be more strict than those for traditional home loans. Financial regulator ASIC warns on its Moneysmart website that low-doc loans “are usually offered at higher interest rates and may include terms that restrict borrowers.”

It’s also important to bear in mind that a low-doc home loan is not the same thing as a non-conforming home loan. Like traditional home lenders, low-doc lenders normally require borrowers to have a solid credit history, which is not necessarily the case with a non-conforming home loan.

Who can apply for a low-doc home loan?

Typically, low-doc home loans are aimed at self-employed people and people who run their own businesses. While the eligibility criteria will differ between lenders, it may often be the case that you need an Australian Business Number (ABN) to apply for one.

What documents do you need for a low-doc home loan?

If you plan to apply for a low-doc home loan, depending on the lender you choose, it is likely that you will need at least some of the following:

• Bank statements from your business or personal accounts
• Details of your business, such as its name and Australian Business Number (ABN)
• Your Business Activity Statements (BAS) for the past 12 months
• Your tax returns for the past two years from the Australian Taxation Office (ATO)
• Information about any assets you own, such as investment properties
• Information about any debts you might have

Some lenders may also request or accept a letter from an accountant, certifying that the accountant knows the details of your financial position, and can confirm that the information you have provided about your annual income is true. This letter must be signed and dated by the accountant, must be on the accountant’s letterhead (unless the accountant is signing a low-doc declaration provided by the lender), and must include details of how long the accountant has acted for you.

What size deposit will you need for a low-doc home loan?

Generally speaking, lenders consider low-doc home loans to be risky, so it may be the case that you need a deposit of at least 20% to purchase a property, whereas in other circumstances, lenders may be willing to offer a ‘full-doc’ or standard home loan to borrowers with a 5% or 10% deposit. Alternatively, some lenders may charge low-doc borrowers a higher interest rate on smaller deposits.

It’s also important to know that the maximum loan-to-value ratio (LVR) for low-doc loans may be low for many lenders, meaning you may potentially need an even larger deposit to be eligible for one, depending on the lender.

What are the pros and cons of low doc home loans?

Potential pros of low doc loans:

• Access to home loans for self-employed borrowers and those who don’t fit the traditional mould
• Less documentation in the application process than standard home loans

Potential cons of low doc loans:

• Likelihood of higher interest rates, as lenders consider these kinds of loans riskier than others
• Stricter terms, for example the requirement to pay a large deposit or LMI
• Potential for higher fees than other kinds of loans

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