Low Doc Home Loans for Self Employed Borrowers
Self-employed borrowers are often told by family and friends that it will be difficult, maybe even impossible, for them to be approved for a home loan. Fortunately, this isn’t true. But it’s a common misconception, based on the experience of self-employed borrowers in “the old days,” when lenders didn’t understand that a self-employed borrower doesn’t receive the exact same level of income week in and week out. But thank goodness times have changed! Low doc home loans are the best mortgage option for self-employed borrowers because they need less documentation than a regular home loan.
With a growing number of Australian’s now operating as sole traders, lenders have caught up with the times and are now offering ‘low doc’ and even ‘no doc’ home loans to people who are self-employed. But what is a low doc loan? What kind of restrictions are there on low doc home loans? How much can you borrow with a low doc home loan? And what’s the difference between a low doc loan and a no doc loan?
Understanding Low Doc Loans for Self-Employed Borrowers
Low doc loans first became available in the late 1990s, introduced by mortgage brokers who had observed the unique difficulties faced by those who are self-employed. The idea of a low doc home loan is that it allows those who are self-employed or working as contractors to provide different forms of documentation when applying for a home loan (not just the stock standard PAYG payslips). They are still required to demonstrate an ability to pay back the loan, but there is a lot more freedom in how self-employed borrowers choose to go about this.
These days, far from being a niche product, low doc home loans are now offered by most of the major lenders, including the big banks.
What Are the Eligibility Requirements for A Low Doc Loan?
To apply for a low doc home loan, a self-employed borrower must meet certain lending criteria. Because a low doc loan presents a higher level of risk for the lender, the borrowing criteria are often stricter. Most lenders will only offer low doc home loans to self-employed borrowers who:
- A borrower should have a high score on their credit report.
- Need a deposit of at least 20% of the purchase price (a deposit of 40% will likely be needed if you want to avoid paying for an alternative risk fee for some of these types of loans).
- Have been self-employed for at least one year (although some lenders will stipulate two years).
Additionally, the property in question can’t be subject to a second mortgage and will need to have an independent valuation carried out (to ensure you’re not paying more than the property is worth or your estimate meets the current market for mortgage purposes).
What Documents Can Be Used for A Low Doc Self Employed Loan?
If you’re a self-employed borrower and you’d like to apply for a low doc home loan, you’ll usually be asked to provide some if not all of the following documentation:
- Evidence of your registered business name and ABN
- Business Activity Statements (BAS) for a minimum of one year
- A signed declaration confirming how much you typically earn
- Bank accounts showing business trading for 6 months
- And maybe a declaration on your income from your Accountant (depending on the lender)
Depending on the lender, you may also be asked to demonstrate that your business is registered for GST and has been for at least a year.
What is the Difference Between A Low Doc Home Loan and A No Doc Home Loan?
A no doc loan doesn’t require a self-employed borrower to demonstrate proof of income. This means that you won’t be asked to provide BAS, tax returns, bank statements or even a letter from your accountant. While this may sound very appealing (no paperwork, hooray!), bear in mind that a no doc loan is considered to be a very high-risk category loan. This means that the eligibility requirements are even stricter than they are with a low doc loan. And only a select few lenders are even willing to consider a no doc loan application.
What Are the Eligibility Requirements for No Doc Home Loans?
If you want to apply for a no doc loan then you will need to, as a bare minimum, meet the following eligibility requirements:
- You must have a deposit that is equal to 35% of the property purchase price. With a deposit of this size, you will be offered interest rates that are typically 2-3% higher than what you’d be offered for a standard loan. If you only have a deposit of 30% then your options are limited to expensive short-term caveat loan products.
- You must have a good credit score.
- You can’t borrow more than $1,000,000.
- The loan must be unregulated by the National Consumer Credit Protection Act 2009 (NCCP).
You may also be asked to sign a statement declaring that you can afford the loan. This isn’t to confirm how much you earn; the lender just wants to verify that you’re confident you can make the necessary repayments.
What Does NCCP Unregulated Mean?
The NCCP Act is legislation that applies to all loans that are owner-occupied, purchased for a personal purpose or that are for a residential investment property. To comply with the NCCP Act, a lender is obligated to confirm a person’s income before they can offer them a loan. If they don’t ask you to prove how much you earn, then they’re breaking the law and could be subject to penalties.
This is why a no doc loan can only be offered for loans that are unregulated by the NCCP. This includes loans that are:
- In the name of a business or company or trust with a valid ABN.
- Solely for investment purposes (not including residential investment properties).
- Secured by a commercial property.
- For the purpose of a business.
If you want to apply for a no doc loan, the purchase will need to meet at least one of the criteria that is listed above.
Are There Any Other Restrictions on No Doc Home Loans?
Because a no doc loan is such a high risk, most lenders will be quite fussy about the property that you’re planning to purchase (since this will be used as security if you default on the loan). Typically, for a property to be deemed acceptable it will need to be:
- In good condition and in a decent location (so it will be easy to re-sell).
- Bigger than 50m2 if it is a unit.
- For a commercial no doc loan, the property can be a factory, warehouse, office, residential property or retail space.
The best way to make sure you end up with the right loan is to speak with a home loan mortgage broker who has experience working with self-employed borrowers. At North Brisbane Home Loans, we understand what’s involved in applying for a home loan as a self-employed borrower. Our team of mortgage brokers can talk you through all of the options that you have available, explain the pros and cons of different products and answer any lingering questions that you may still have. Best of all, a North Brisbane Home Loans broker will never suggest a home loan product that isn’t in your long-term and short-term best interests. Instead, we’ll help you find the right solution to fit your needs.