Self-Employed Borrowers: Low doc home loan options
Looking to buy a home, but you're self-employed? Even though your finances may look different to salary-earning borrowers, there are still loans available for you.
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When you're self-employed, applying for a home loan requires more information to verify your income. This is because self-employed borrowers often have inconsistent or unstable income compared to a regular salary earner (sometimes called a PAYG borrower).
Low documentation, or low doc, loans allow self-employed borrowers to buy property without regular pay slips. To get one of these loans you need to provide documents such as your tax returns, financial statements from your account and bank records.
What's in this guide?
- Compare low documentation loans
- What is a low doc home loan?
- Who is classified as self-employed for a low doc loan?
- Can I apply for a self-employed low doc loan?
- What loans are available to self-employed borrowers?
- Pros and cons of self-employed home loans
- What documents do I need to apply for a low doc loan?
- More questions about self-employed borrowers
Compare low documentation loans
What is a low doc home loan?
A low documentation home loan, most commonly known as low doc, offers credit to people who work for themselves and run their own business. These are borrowers who otherwise wouldn't be able to meet the full documentation loan application requirements.
As the name suggests, a low doc loan is low on paperwork. Different lenders have different application requirements, but generally, you'll only need to supply a signed Borrower Certificate of Income Declaration Form, Business Activity Statements (BAS) and tax returns (if you have them). Some will allow you to self-declare your business income and ask for no other forms of income verification besides checking that your Australian Business Number (ABN) or Australian Company Number (ACN) has been registered for more than two years and is also registered for GST.
The majority of low doc loans have slightly lower loan to value ratios (LVR) than full doc borrowers may have access to. This often means you'll need a larger deposit or a higher amount of equity to qualify for a loan. For instance, a full doc loan may have an LVR of 80% to 90%, whereas a low doc loan might have an LVR of 60% to 80%. The LVR signifies the percentage of the loan that you can borrow without having to pay lender's mortgage insurance. Learn how to calculate your LVR here.
Who is classified as self-employed for a low doc loan?
Any self-employed borrower who is unable to qualify for a traditional home loan can be classified as a low doc borrower. Some banks will also classify self-funded investors as low doc borrowers too. A company or trust will also often consider a low doc loan over a full doc loan to reduce the paperwork involved in the loan application.
Full doc loans for a company or trust may require two full years of financial statements and tax returns for the borrowing entity, in addition to two full years of tax returns for the individual as well. In this case, opting for a low doc mortgage can reduce the red tape involved in the application, but it's at the cost of a low doc home loan premium.
Can I apply for a self-employed low doc loan?
Anyone can approach their regular bank and enquire about a self-employed low doc loan. However, not all banks or lenders cater to these types of borrowers. This is where it may be beneficial to discuss your specific needs with a mortgage broker, preferably one who is experienced in dealing with self-employed borrowers.
A good broker will know which lending institutions are most likely to have pro-self-employed policies and offer competitive low doc loans, and which banks and lenders to steer clear of. They'll also know which lenders will allow you to self-declare your income and which ones may still want to see limited amounts of paperwork and documentation to verify your income, which is important if you've been operating your business for less than two years.
That said, there are still some specialty lenders that will allow you to apply for low doc mortgages, even if your ABN has been registered for less than the usual two years. A good mortgage broker will know which lenders can overlook this requirement.
What loans are available to self-employed borrowers?
Self-employed borrowers can access the same type of loans as full doc borrowers, including:
- Variable rate loans: Flexible loans that are attached to a variable interest rate.
- Fixed rate loans: Loans with fixed interest rates for a set period of time, usually 1-5 years.
- Construction loans: Designed to help you minimise your repayments when building a property.
- Lines of credit: Also known as a home equity loan, these allow you to borrow money using the equity in your property.
Pros and cons of self-employed home loans
As with any mortgage, self-employed low doc home loans have various pros and cons:
- Less documentation: Low doc loans require significantly less documentation to be provided in order to verify sole trader income or business turnover.
- Faster application process: As there is a low documentation requirement, you'll save time tracking down your financial statements, tax returns, BAS statements and other verification from your accountant. This lets you get your application submitted much faster.
- Convenience: The ability to forego all the mountains of paperwork required to verify a traditional self-employed loan is very convenient for a busy person running a business. If you can find a lender willing to accept a self-certification for your income, or maybe just your last few BAS, this is much easier than providing mountains of paperwork.
- Convert to full doc: Many lenders will allow low doc borrowers to convert their self-employed home loan over to a full doc loan after a period of time without asking for financial verification. In most cases, this is after two or three years and only if the loan repayments have been made on time throughout that period. Converting the loan over to full doc can often mean a slight reduction in interest rate.
- Lower LVR: Many banks will limit the amount of money you're able to borrow against the value of the home you're buying or using as security. Instead of being able to borrow up to 90% of the property value, as a full doc borrower can, a low doc borrower is often limited to borrowing 60% to 80% of the property's value.
- Higher interest rate: Many lenders view low doc loans as being riskier than fully verified loans. For this reason, they may charge a slightly higher interest rate as compared to a regular mortgage for a borrower. This is known as a low doc interest rate premium. There is still the possibility that many lenders can revert the loan over to a full doc loan after a period of time, as long as all the payments have been met.
- Fewer lender options: Not every bank or lending institution will accept home loans from low doc borrowers. Aside from this, some lenders will still require more documentation than others when trying to verify a low doc home loan. This limits your options and makes it more difficult to negotiate for better deals on interest rates.
What documents do I need to apply for a low doc loan?
The level of documentation you need to submit with an application for a self-employed home loan can vary widely between different lenders. However, here's a guide to help you work out what you might need:
Big banks will ask that self-employed borrowers provide two full years' worth of financial statements, including tax returns, profit and loss statements and often the last two or three BAS as well. If you have other income such as investment income, you may also be asked to provide this as well. However, there are low doc lenders available that may only ask for your last three or four BAS and little else.
There are also some lenders that will be happy for you to self-certify your income. This is where you sign a certification that you do earn sufficient income to comfortably afford the repayments on the loan amount you're applying for. You may be asked to provide your accountant's contact information to confirm this.
When banks consider low-doc home loan applications, they do assess what level of equity and assets you have available. For this reason, some lenders may ask you to provide copies of your Council Rate notices, showing a capital value for your property. You may also be required to show bank statements to verify savings and copies of any other investments you might hold.
Credit history verification
Some lenders will ask to see the past three months of statements for your credit cards, transaction accounts and statements showing timely mortgage repayments. This gives them an idea of how much money is flowing through your accounts and how you're handling your financial obligations as a self-employed borrower.
Contract of Sale
If you're purchasing a home, you will need to provide a copy of a signed, fully executed Contract of Sale for the property.
If you are refinancing an existing mortgage over to a new lender, you may be asked for 12 months' worth of home loan statements to show that you're meeting your payment obligations. If you're consolidating other debts into your mortgage, such as personal loans or credit cards, you'll need to include statements for these too.
How to get your low doc home loan approved
Perhaps the biggest key to getting any home loan approved is to find the right lender for your specific circumstances. Every lender has different lending policies and some are more open to receiving low doc loan applications than others. These policies will dictate how the lender views self-employed home loan applications. This means you risk having your application declined if you approach a bank that won't be lenient with a self-employed borrower. So the key here is to do your research of contacting a good broker who can start you off in the right direction.
Another consideration for self-employed borrowers is that one of the biggest problems they face when applying for a home loan is that their accountant is often too good. Your accountant works very hard to reduce your taxable income by writing down a lot of your business expenditure. While this might help reduce how much you pay in tax, it also has a negative effect on reducing how much you're able to borrow at the same time. After all, writing down the depreciation on a business vehicle or investment property doesn't actually reduce your real income in terms of how much money you made. It's more like a paper loss. But banks rarely see it this way. They assess how much you can borrow based on your taxable income figure and little else.
If you really want to improve your chances of being approved for a self-employed low doc loan, you might want to consider talking to a mortgage broker about your options. This way, you'll have a far better chance of approaching a lender that will welcome your application and have lending policies in place that are more likely to suit the level of documentation you're able to provide.
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