A low documentation loan is a type of home loan that usually requires you to prepare a decreased amount of income proof often as BAS (business account statements) or an accountant’s declaration. Therefore, you do not need to provide any of the normal income proof such as tax returns or financial statements and your lender will just need you to arrange the previously mentioned documents.
If you are self-employed and asking to borrow money, the lender would request you to present the last two years of tax returns and assessments of your business and yourself, two years of financial statements and sometimes even BAS statements or interim accounts.
This is because banks recognise self-employed people as of being at higher risk and assess them a lot more harshly. By using a Low Doc loan, all that is needed is to provide a decreased amount of income proof often as BAS (business account statements) or an accountant’s declaration and on a form affirm your income.
Reasons for a Low Doc Loan
There are usually two reasons to use a Low Doc loan.
First one is that a range of businesses such as taxi drivers and retail outlets earn their income through dealings with cash which does not get recorded . As a result, the income shown on their statements would not be their true income and on many occasions the Lender would see the income on the statements as being too little to allow them a loan.
The second reason is that you may be unable to prove your income. This can be due to:
- Not receiving up to date tax returns
- Your company having a complicated structure
- There having been large deductions like depreciation which isn’t counted as being a real expense
- Some of your income being shared between other family members through your trust
- Your income having increased since your last tax return so it wouldn’t show your true income.
Income Declaration Form
An Income declaration is the form used when applying for a Low Doc loan which allows for the banks to identify your income. Every bank will have a different Declaration Form, but it usually consists off a place to write your name, the ABN of your business, the amount you want to borrow, the indicative repayments as well as a space at the bottom to affirm that you have stated your true income and that it is possible for you to make the repayments. The form will vary from lender to lender and some lenders will ask you certify your assets and liabilities while other lenders allow you to not even have to declare your income.
Low Documentation home loans are of higher risk to banks and so they are usually harsher in assessing them and have more limitations.
Generally low doc loans have higher interest rates than full doc loans and also it is dependent on the lender you are with and the documentation you present. Low Doc Loans tend to have a larger deposit required, usually 20% of the property price though this can change depending on the Banks and if you borrow more than 60% of the property value usually mortgage insurance is required.