A low-doc or no-doc home loan is ideally suited for investors or self-employed borrowers looking to refinance, purchase or renovate. Since home loans require proof of income for the last 2-3 years, investors or self employed borrowers who have yet to complete their tax returns are fall outside of home loan providers strict lending criteria may find it difficult to obtain a mortgage. As a result, low-doc home loans were developed as a way of catering for this market.
If you take out a ‘low-doc’ (low documentation) loan you won’t need to give your lender or mortgage broker as many documents to prove your income, assets and liabilities. You still have to make a formal application and sign your loan agreement, but you may not be required to produce payslips, tax returns or other proof of income normally required. You are usually simply asked to self verify your income.
However, in exchange for less documentation requirements and the associated higher risk to the mortgage lender, you typically find:
• You pay a higher interest rates
• You pay additional fees and charges, including ‘risk fees’
• Pay a higher amount towards Lenders Mortgage Insurance
• You have to put down a higher deposit
A low doc loan is an excellent way of obtaining a home loan for those that are otherwise unable to purchase their own home
Low doc loans have at times been aggressively marketed to those with a troubled credit history, casual workers and the self-employed, ie those who may be in a weaker position when it comes to dealing with the financial risks involved. Be conscious of the additional costs associated with a low doc loan. Whilst it’s an excellent way of obtaining a mortgage for those that would otherwise be unable to purchase their own home, it should always be perceived as a second choice to standard mortgages.
With many low doc loans it’s up to you to decide whether you can afford the repayments. Just because a lender is willing to give you a loan, doesn’t automatically mean you can afford the repayments. Underestimating if you can afford your home loan payments may result in you losing your home.
Remember, in the event of repossessing your home, lenders are looking to recoup their debt, not your deposit, if they only recoup their costs, it’s your loss!
In considering a low doc home loan you need to weigh up the extra costs involved. If you can get a lower interest rate by giving more documentation about your financial history to the lender, you should do so. Lower costs, means more money in your pocket.
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