The traditional home loans can be an absolute nightmare for the self-employed. The lenders expect the self-employed to submit more paperwork than the others (to substantiate their current and future income). The lenders are very hard on the self-employed. I have had this experience myself and my bank manager literally drove me crazy with the constant requests for more and more paper work. Low doc home loan is the perfect answer to all the ‘paperwork’ problems faced by self employed people.

You still have to apply in writing for a low doc home loan but the lenders don’t need much paperwork. You don’t need to submit paperwork about your assets and liabilities and proof of income. The loan officers use a method called ‘self verification‘. Self verification is simply the process of just stating your income without any accompanying paper work.

Anyone can apply for these loans. They are however specifically beneficial for the self employed, contractors, people who work part time, people who work on a commission basis and casual workers. These loans come with certain costs and hence if you are someone with a regular job then you should give this loan a miss and opt for the traditional home loan.

Most of the lenders make ‘good credit history‘ a prerequisite for these loans (and rightly so). There are some lenders who lend money even to people with bad credit history. And this is where the drawback of these types of loans sets in. By lending to people with low income, insecure income and bad credit history the lenders are creating a disaster waiting to happen. If lent only to people with good credit history and who can service the loan, these loans can prove to be a blessing for many.

You can borrow anywhere between and 60 to 80% of the property value. So this means you need a high amount of deposit money saved up before you apply for these loans - more deposit than the traditional home loans. Having said that again there are some lenders who offer up to 95% of the property value. This is where you have to exercise caution. Though it can be tempting to borrow such high amounts and buy your dream house you should restrain from it. There is good reasoning behind why most lenders offer only between 60 and 80% of property value. The people who apply for low doc home loans do so because they are self employed and there is always a degree of risk associated with this type of employment. And hence due to this risk it is wise to borrow only between 60 to 80% of property value. If you get tempted to borrow more you might face problems in the future…You will be forced to sell your property or worse make early withdrawals from your super fund. Just because some lenders are lending huge amounts does not mean you should borrow such huge amounts.

The interest rates of low doc home loans are usually higher than your regular standard variable rates. How much higher depends on the type of low doc home loan…There are three types of low doc home loans -

• Account Statement: These types require slightly more income evidence. Lenders usually ask for a letter from your accountant. The interest rates are more in line with the standard variable loans.
• Self Declared Income: This type requires you to sign a declaration of income. The difference in interest rates is slightly higher than the ‘Account Statement’ type.
• Asset Lend: This type of loan requires least amount of evidence to be presented. No paper work or no signed declaration is required. The loan is secured purely on property value. The difference in the interest rates between your traditional and low doc loans is the highest for this type.

There is one more extra cost with the Low doc home loans and thats the ‘Mortgage Insurance’. Most lenders ask you to take out a mortgage insurance…This can be anywhere from 2000 dollars and higher.

Before you decide on a low doc home loan do your research, shop around, understand all the fees thats involved and finally deal only with a MFAA recognised lender (a lender accredited with the Mortgage & Finance Association Of Australia).. And never cross the cardinal rule of home loans - ‘don’t borrow more than you can service’.

Have you had any experience with these loans ? What are your thoughts and experiences…Share them…

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One Response to “The Low Down On The Low Doc Home Loans”

1. Cary Wadell Says:
   January 29th, 2008 at 5:58 am

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