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Low Doc Home Loans
Low Doc or low documentation home loans are typically designed for people with limited access to financial statements or who do not have at least two to three years’ worth of financial statements.
The most common users of Low Doc Home Loans are self-employed and small business owners who are looking to access finance and who can’t always access finance through traditional prime methods.
There is a very strong market for these products as there are so many more people who are self-employed and do not meet the same traditional methods of obtaining credit. Increasingly small business owners and self-employed individuals are using these products to access finance to buy property.
What they are
Low doc home loans reflect the changing nature of our society. Approximately 30% of all people in the workforce today are self-employed. Increasingly this sector of the community is unable to provide the full documentation required to apply for a home loan. Low Doc Home loans alleviate that requirement to a certain extent.
Applicants are still required to demonstrate the ability to pay off a home loan but the requirements are altered to assist with the application.
What you need to do
As a minimum you’ll need to supply one years’ worth of financial statements. These documents typically are what you have supplied to the Australian Taxation Office. These documents are the basis for the application. These documents will demonstrate revenue, expenses, salaries and the like. Other documents will also be required such as proof of incorporation or ABN and finally you the borrower will be required to sign a statement of affordability attesting you can afford to pay this loan.
Banks and other lenders take quite a vigorous approach to determining serviceability.
As you would expect interest rates on Low Doc Home Loans are higher than on standard loans, but not by much. Typically you’ll be able to access Low Doc Home Loans at the bank’s standard rate of lending. Typically you will not be eligible for any discounts from interest rates. As a result the effect of a Low doc Home Loan is that you’ll typically be paying somewhere between 0.80% and 1.00% over and above advertised interest rates for your home loan.
In the scheme of things it is not a lot extra, but you need to make sure what you are buying is worth the increased interest rate.
Banks and other lenders also like to limit their exposure on any one loan. Typically there will be smaller lending limits for Low Doc Home Loans. These limits will also vary by the Loan to Valuation Ratio (LVR). Typically the higher the LVR the lower the loan limit will be set. As example Westpac limits lending to $1.5m for LVR’s up to and including 60%. Whereas for home loans with an LVR from 60%-80% the limit will be $1.0m.
Typically for standard loan there is no actual limit that will be placed upon your lending provided you have serviceability (the ability to pay). Loan limits are put in place by banks to limit their risk and exposure to higher risk lending such as Low Doc Home Loans