Low Doc Home Loans For The Self-Employed

Qualifying for a home loan can be difficult if you don’t have a solid record of regular salaried employment over a number of years. Prospective lenders always want to see some evidence of income and that usually means providing payslips or regular bank statements.

However, if you’re self-employed or work as a contractor or on a casual basis, you mightn’t have much of a record of your finances or even a credit history, especially if you’re in your early 20s. The good news is that you can still get a home loan using what is known as a low documentation (“low doc”) loan.

What is a “low doc” home loan?

A low doc loan, also known as an “alt doc” (alternative documentation) loan, is a type of home loan that’s an option if you can’t provide direct evidence of regular income.

“Low doc” doesn’t necessarily mean providing less documentation — just different evidence of income for eligibility purposes.

Providing proof of self-employment or business income

If you’re self-employed or a sole trader, this means having up-to-date records of your financial transactions. Every lender is different, but they will generally want to see a combination of some or all of the items below:

Australian Business Number (ABN).
Business Activity Statements (BAS).
Bank statements for at least the past 12 months.
Tax returns.
A letter from a certified accountant confirming your financial history.

Your lender will want to be sure that you are making enough money to repay your loan, which generally involves providing your quarterly BAS from the Australian Taxation Office or bank account statements for 12 months or more. At the least, they will want to see evidence of regular income from a particular profession for at least 12 months but usually longer.

Beware of the pitfalls of low-doc home loans

Low-doc home loans are well suited to freelancers, contractors, sole traders and just about anyone who doesn’t get a regular wage from an employer. With a low-doc loan, you get your foot in the door and you can renegotiate the terms of your mortgage once you’ve made a sufficient number of regular repayments, depending on your lender’s terms and conditions.

However, there is no shortage of cons.

Tedious application process

First and foremost is the application process, which can be more complicated because your lender isn’t just relying on your regular wage and some evidence that you’re saving for the deposit. This means potentially waiting longer to get approval.

Extra costs, requirements and fees

Then there’s the risk element, which unfortunately for the borrower weighs heavily on you in the form of lenders mortgage insurance (LMI). Lenders usually require a higher deposit for low-doc loans, so while the usual deposit required to purchase a property without having to pay LMI with a standard variable loan is 20% of the total mortgage, it may be as high as 40% with a low-doc loan.

In some instances a lender may also attach a risk fee to the mortgage, depending on your circumstances.

Higher interest rates

Additionally, your lender may charge a higher interest rate, or restrict the locations in which you can search for a property, depending on your risk profile. It’s therefore imperative that you check things like the deposit required, the interest rate, when you can renegotiate to revert to a standard variable loan, and any fees and charges associated with your mortgage.

A pedantic approval process

Last but definitely not least is the approvals process and just how pedantic your lender wants to be. Getting the required documentation together may turn out to be a painstaking task, but there are some things you can do to expedite the process.

Talk to your accountant if you have one to get your papers in order, at least with regards to your BAS statements and tax returns, and take steps to ensure you have the highest possible credit rating by clearing credit card debt and paying out personal loans.

NERDY TIP: When you take out a low-doc loan, remember to make sure that you can renegotiate it for a better interest rate and other terms and conditions within the shortest possible timeframe, which is really once the lender is confident in your ability to keep repaying the loan.

Other mortgage options for the self-employed and sole traders

Non-conforming home loans

Another option that falls into the low-doc category is a so-called non-conforming home loan, where would-be homeowners with a troubled credit history can still get a loan.

This could be due to any number of factors leading to missed credit card, car or rent payments. However, if you can now demonstrate an ability to repay a mortgage now, then you may still be eligible.

This loan category could also suit those with little or no credit history at all, possibly because they are new arrivals.

Non-conforming loans, like other low-doc loans, are usually accompanied by a higher interest rate than the standard variable but they can be renegotiated once the mortgagee has established a record of repayments over a period of 12 months or longer.

Talk to your lender

If you’re unsure if you qualify or about what you need to provide, you should always check with your lender. You should also talk to a mortgage expert to decide which loan type is right for you. Additionally, you may want to consider a guarantor, if possible, which may make the whole process a lot easier and also be sufficient for your lender to offer you a much better deal.

Yes, low doc and non-conforming home loans are still available. This mortgage option is offered by some banks, credit unions, building societies and other non-bank lenders to self-employed borrowers who meet the eligibility requirements.