Low Doc Home Loan

Low doc loans or low-documentation loans are designed to help home loan applicants who do not have all the standard financial documents typically required to make a home loan application. These low doc loans are popular with the self-employed, small business owners, part time workers and contractors., all of whom may own assets and have an income, but due to the nature of their work are unable to provide the usual documents such as payslips, financial statements or tax return required as evidence of their income.

All low doc home loan applicants are still required to demonstrate that they have the ability to repay the home loan just like a standard home loan, the only difference is that the information which the lenders use to access the applicants ability to repay has been reduced to reflect the circumstances of these types of customer. 

How to select the best low doc home loan

When making an application for a low doc home loan all lenders will require you to complete, and sign a statement of affordability, this document is designed to attain as much accurate data on your income as possible. The lender will then initially access whether you have sufficient income to service the home loan amount you’re applying for and then move on to verifying the details provided in the statement.

Documents required to apply for a low doc home loan?

The National Consumer Credit Protection Act of 2009 regulates how lenders provide credit to customers, and a key part of this law states that lenders must make reasonable enquiries about an applicants financial situation and also endeavor to verify the accuracy and truth of these enquiries.

To comply with this act lenders will have a process designed to help them verify your ability to repay the home loan. This process will normally include the provision of an affordability statement by the applicant, which features the applicants declared income and ability to repay the loan.

As supporting evidence to the affordability statement applicants will be asked to provide the following documents, lenders requirements for supporting documentation differ, with some requesting less than indicated below:

  • Latest Business Activity Statements (BAS)
  • Your last 12 months worth of statements will be used to help your lender to decide whether or not you're able to afford the loan given your declared revenue.
  • Registered business name and ABN
  • As a low doc home loan factors in any income made by you through your business your lender will likely request information about your business, including your registered business name and Australian Business Number (ABN).

Self-verified income declaration

If the lender does not require payslips or tax returns to support your low docs home loan application they will ask that you sign a statement verifying that you earn the amount you say that you earn, and that you can afford the loan.

Previous bank statements

Some lenders will request to see your last 6 months statements from your bank accounts.

 

Important facts about Low Doc Home Loans

Interest rates

Low doc home loans generally have higher rates of interest than standard home loans, reflecting the greater risk of this loan type to the lender, these higher interest rates should be considered in association with the loans features when making your comparison of low doc home loans.

Generally Low Doc Home Loans do not feature any discounts on interest rates, as a result you’ll typically be paying somewhere between 0.80% and 1.00% over and above advertised interest rates of a standard home loan. In repayment terms if your low doc home loan is 1.00% above the standard rate your interest charges would be about $1,000 extra per year for each $100,000 borrowed.

 

Insurance

Low doc home loans are considered to be higher risk than Standard home loans by the lenders. With standard home loans lenders mortgage insurance (LMI) is generally required when the loan to valuation ratio (LVR) is 80%. Low Doc Home Loans have a lower threshold of LVR starting at 60% as opposed 80%.

 

Switching to a standard home loan.

There are no formal time limits on how long you must remain on a low doc home loan, though the majority of lenders will require you to stay on low doc loan for a set period of time unless you refinance out of those products to another lender. The minimum period lenders generally set is in the range of 2-3 years, based on the fact that this amount of time provides a reasonable insight into your ability to manage a home loan that could be used to apply for a standard home loan.

It is important to note when accessing the low doc home loan options that some lenders place heavy exit fees on these loans which can make it costly to switch to standard home loans in a timely fashion. 

Frequently Asked Questions

What is the difference between a Low Doc Home Loan and a No Doc Home Loan?

A low doc home loan requires some evidence of income, such as your BAS and bank statements. A no doc home loan on the other hand is a loan where you simply supply a signed statutory declaration stating you can afford the home loan.

What is an Income Declaration Form and why do I need to provide this?

An Income Declaration Form is a method for the banks to verify your income when applying for a low doc home loan.

Typically, the form will ask you to state your name, your business’s name, your business’s ABN, the amount you are borrowing and the indicative repayments. At the bottom of the form is usually a declaration confirming that you believe that the income you are stating is true and that you can afford to make the loan repayments.

Every lender has their own Low Doc Declaration, so it may vary. Some lenders will also ask you to verify your assets and liabilities, while others have a no doc option that will allow you to not even declare an income or anything about your asset position.