What is a Low Doc Loan?
Low Doc Loans (and Low Doc Home Loans) were created to streamline the loan application process for the ever growing self employed borrowers. These home and commercial loans are designed for people to have the means to meet the loan repayments but are not able to provide sufficient documentation to support their income.
Normally a lending financial institution would require the prospective borrower to provide with two years of personal or business tax returns or audited business financials. Some business owners find it hard to keep the paperwork up to date, and the banks understand it. The lenders reduced the verification paperwork requirement to a letter of "Self Certification" where the borrower confirms that they are able to meet loan repayments without undue hardship.
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Low Doc Loans are basically the same as any other bank loans, but with a slightly higher interest rate to cover the extra risk the bank will take to provide the borrower with money. They ca have a variable rate or a fixed rate interest arrangement.
Low Doc Loans vs Bad Credit Loans
It is important not to confuse "Low Doc Loans" with "Bad Credit Loans". Bad credit implies that the borrower had problems with paying bills on time or even bankruptcy in the past. Low Doc are not only for people with bad credit. They are primarily designed to avoid the extensive paperwork for self employed or small businesses. Whether the borrower has bad credit or not, the new loan will need to be secured against the borrowers assets, be it property, business or something else. The banks in Australia will ask for some tangible proof that the new loan payments will be met and the new loan will not jeopardise the borrower's ability to meet his or her daily financial needs.
How much Can I Borrow?
These loans are much the same as any other bank loan. The lender normally will allow people to borrow any amount that is less than or equal to 60% of the value of the security provided.
Some banks will let people borrow up to $2,500,000 if the amount is between 60% and 80% of the value of the security.
For anything more than 80% of the value of the provided security, you may need to shop around. And also seriously reconsider your ability to make the repayments.
What Can I borrow for?
People can borrow for any legitimate purpose, including investment or owner occupied properties, small business needs, car loans and more.
Low Doc Loans for Self-employed
If you run your own company and you don't have all the paperwork that is required to apply for a bank loan, this type of loan may be the answer. It will allow you to obtain the finance when you want without the usual financial statements, paperwork or tax returns.
Some businesses use it as a "step in the door", to get the finances when they are critically needed. Once the business starts repayments and organises its financials, the loan can be refinanced for a more acceptable terms.
Low Doc Loans for people with low income
It is absolutely critical for people with low income to do a proper budget forecast for the next few years. The Loan application may not ask you for income supporting documents, but the bank will definitely ask you to make the minimal repayments. In additions to that, as mentioned above, all such loans need to be secured against the borrower's assets and you can only borrow up to 60% of the value of the security provided. If you are not able to meet the repayment commitments, the bank may reclaim the assets that were provided to secure the loan.
Who offers Low Doc Loans?
These Loans are offered by most financial lending brokers as well as major Australian banks, home societies and credit unions. It is a good idea, however, to approach major banks first, for a conditional loan preapproval. A 20-min appointment with a mortgage officer in the bank will give you a clear understanding of what you can and cannot do with your money and assets. People often forget that the banks are just as keen to win your business as any other financial broker. It is actually cheaper for the bank to lend money directly to borrowers, than pay commission to financial brokers for every customer they refer.
Refinancing
Even if your initial deal was secured through a financial broker, it is likely that it will be serviced by one of the major banks in Australia. Once you organised your documents (tax returns etc), go back to the bank that gave you money (not to the broker!) and ask them if you are able to refinance your loan. You may be surprised how easy the process is to get a better deal and better lending terms.
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