How to successfully find a home loan if you're self-employed.
Low doc home loans, otherwise known as lite doc, or alt doc loans, offer you a home loan option if you're self-employed. Rather than having to provide payslips, you can usually self-certify your income by providing statements from your accountant, recent Business Activity Statements, or a self-signed income declaration form.
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Low documentation loans are flexible lending solutions for self-employed borrowers. These can be useful for freelancers, contractors and other people who don't work regular jobs. A low doc loan is specifically designed with those borrowers in mind who have assets as well as income, but cannot provide payslips, financial statements or tax returns as documented evidence of income.
These types of loans use a type of self-verification system where you can state what you make with a declaration document. While this does mean that you won't have to give any actual proof of your income, the lender will still do their usual credit scoring as well as confirm that you will be able to pay for your loan with the income which you have stated on your form. You may also be required to provide an accountant's letter and bank statements.
Some of the main differences between low-doc home loans and other more traditional types of home loans are:
- A lower maximum LVR, meaning you can usually only borrow up to 80% - although some will lend up to 90%
- Sometimes a slightly higher interest rate, to compensate lenders for the increased risk low doc lending presents
- A low doc home loan applicant doesn't have to produce company financial reports or taxation returns in the same manner as do other home loan applicants.
- Lenders will accept an income declaration that confirms the applicant can afford the loan and has the ability to repay.
Low doc home loans can be a good option for the self-employed, but since they often carry higher costs, borrowers should take the time to work all the figures out using a loan calculator to ensure they can really afford these loans. Additionally, it is often a better strategy to wait until you have a 40% deposit so you don't have to pay the high LMI premiums such high-risk loans incur.
These types of loans are normally offered as a way of meeting the requirements of small business owners, freelancers and other people who hold an ABN. They are designed for self-employed people who otherwise wouldn't be able to get a home loan due to their inability to show how much they earn using traditional methods. Generally, the eligibility requirements from lender to lender will differ, but in most cases you'll be required to have an ABN and be able to supply the documents listed in the section above. In most cases you'll need to still have a good credit history, and your lender will want to know that you can afford repayments. Generally, low doc home loans might suit the following borrowers:
If you are self-employed you know how much you earn over the course of the year and you know how much spare cash you have in your budget each month to dedicate to your home loan repayment. However, if you have only been in business for a few years or your income appears inconsistent because you run your business to be tax effective instead of to turn over high profits on paper, then you can benefit from self-certifying that you are able to service a loan.
As an investor you may not have a regular income or employment history if you rely on your investment income. However, if you are in the market for a new investment property then you can use a low doc loan to help make your next investment a reality. If you are an investor looking at applying for a low doc loan also keep in mind that the rent you receive from your investment properties is not included on your BAS turnover so you will need to make sure the income you are assessed by is high enough.
In a similar situation to self-employed Australians, contract workers may work for a portion of each year and then spread their income out over the year. Because of this more irregular income source, if you're a contract worker you may have to seek a low doc home loan.
Low doc loans after the GFC
Many Australian lenders have tightened their lending criteria on both full doc and on low doc loans since the GFC, so while low doc loans aren't as easy to get approved, they're still available from a range of lenders. Previously if you were self-employed and could not show a regular income, you could still successfully apply for a home loan and in most cases you simply needed to provide proof of your registered business, provide a signed document to self-certify your income, and provide a 20% deposit.
In the wake of the global financial crisis, low doc home loans have now become much more similar to traditional loans. If your loan to value ratio is now more than 60% you will generally need to provide BAS documentation for four previous statement periods. Lenders will also assess your income on the basis that 40% of your turnover is assessable income; however, if you can provide tax return documentation of proof of your business expenses and you can show, for example, that your costs are only 10% of your turnover then more of your income may be taken into consideration by the lender to assess your eligibility.
Many diverse lenders will offer a low doc home loan of some sort, including banks, credit unions, building societies and other non-bank lenders. Below are some of the lenders which offer a low doc home loan. Note that each will have different lending criteria, rates, fees and features.
- State Custodians - State Custodians offers self-employed borrowers competitive rates and a range of unique features, including loyalty interest rates, high maximum LVRs and also offers bad credit low doc home loans, which take into account unpaid defaults, late payments and more.
- Pepper - Pepper offers a range of home loans for self-employed borrowers, which also includes those who have credit impairment.
- CBA - The Commonwealth Bank has a range of low doc home loans, including a standard variable rate home loan, fixed rate home loan, basic variable rate home loan and a line of credit home loan.
- RAMS - RAMS is a non-bank lender which offers three low doc home loans: a fixed rate home loan, a regular variable rate home loan with redraw and interest rate discounts available, and a line of credit to help you access equity.
- Westpac - Similar to CBA, Westpac provides a standard variable rate low doc home loan based on their Rocket Repay Home Loan, an investment home loan and a line of credit. Borrowers can also take out the Premier Advantage Package with these loans, which comes with fee and rate discounts.
- St.George - St.George features fixed rate, variable and equity loans for low doc borrowers. Features can include full interest offset accounts and fixed rates for up to five years.
- Adelaide Bank - There are a range of loans available through Adelaide Bank for self-employed borrowers, including variable, fixed and low doc loans which don't require LMI.
- ANZ - ANZ offers the ANZ Lo Doc home loan, which allows you to choose from their Standard Variable or Fixed Rate home loans. This means you can make use of options such as 100% offset accounts and redraw facilities.
Lenders by law must fulfil the National Consumer Credit Protection Act (NCCP) of 2009 by making sure that they make reasonable enquiries about your financial situation and verify the information you provide. This means they'll verify your ability to repay the loan using a combination of your declared income and your declared ability to afford the loan. When you're declaring your income and affordability, you'll need to supply the documents listed below.
While you don't have to show as much evidence you still need to complete the loan application process to be approved as a low doc borrower, and in many cases this will still require some documents. A low doc home loan application will require one or more of the following.
Business Activity Statements (BAS)
In most cases you'll be required to submit 12 months' worth of statements, which will help your lender decide whether or not you're able to afford the loan given your turnover.
Registered business name and ABN
Because a low doc loan takes into account income made by you through your business, your lender will want information about your business, including your registered business name and Australian Business Number (ABN).
Self-verified income declaration
Where you don't need to provide payslips or tax returns with a low doc loan, you will need to sign a statement verifying that you earn the amount you say that you earn, and that you can afford the loan.
A letter from your accountant
Similar to the signed income declaration mentioned above, your lender might also require an income form signed by your accountant.
Previous bank statements
Depending on what lender you opt for, they may want to see statements from your primary business bank account. These are usually requested for as far back as six months.
What about 'no doc' loans?
Since the GFC and the NCCP Act, the number of lenders willing to offer low doc loans with no additional documentation (also known as 'no doc' home loans) has dropped significantly. As a result, many lenders now require borrowers to supply at least a BAS for the past 12 months.
As previously mentioned, the conditions for low doc home loans are more restrictive than standard residential bank loans since they present a higher level of risk for the lender. This means you generally cannot borrow more than 80% of the property's value, and any loan with an LVR higher than 60% will incur a lenders mortgage insurance premium. Note that some lenders may offer a low doc home loan with a high maximum LVR of as much as 90 - 95%, so be sure to use the table above to compare.
To access a low doc loan with an LVR of 60% or below, your ABN usually needs to have been registered for more than 1 year, to prove your status as a self-employed professional. If you are declaring earnings in excess of $75,000 per year, your ABN must generally be GST registered. Your credit history also needs to be in good order.
The only difference for low doc home loans with an LVR over 60% is that your ABN generally needs to have been registered for a minimum of 2 years. You will also be required to pay an LMI premium, which is why you should use a loan calculator to accurately calculate your LVR as this premium can practically double with the increase of the LVR.
Yes, low doc loans can be refinanced. You can compare loan options in the table above.
Before you start considering refinancing your low doc loan to get a better deal, keep in mind that you will need to essentially reapply for a new loan, and qualifying for a low doc loan several years ago doesn't mean that you will automatically be able to refinance now. You may be subject to stricter eligibility and documentation requirements, so if you're buying a new property or refinancing to a low doc loan make sure all of your financials are up to date to make sure your home searches are not in vain.
If you're refinancing to a new home loan for a better rate, remember that sometimes the easiest thing to do is let your lender know you're thinking of refinancing, and ask for a better rate. In many cases they'll give you a discount, saving you the trouble and cost of refinancing.