You’re self-employed and you need a home loan. Should you take out a low doc loan or would a traditional loan be a better choice?
The answer depends on your individual situation. Both options have pros and cons, just as every lender has different lending policies and some are more open to receiving self-employed home loan applications than others. As your mortgage broker, we know who these lenders are and what criteria and documentation you’ll need to achieve a successful application process.
If you take the low doc home loan path
Know that it is unlikely you will be allowed to borrow more than 80% of the value of the property and you will probably pay Lenders Mortgage Insurance (LMI) if you are borrowing over 60%.
You may also be charged a slightly higher interest rate to account for the extra risk that some lenders associate with self-employed borrowers who are not able to show evidence of a stable income.
The benefit of a low doc home loan is that it is quick and simple because it requires significantly less documentation. Every lender’s policies are different, but many require you to supply a Business Activity Statement (BAS), as this will help assess whether you’re able to afford the loan. Other common document requests include previous bank statements and a letter from your accountant.
Since the global financial crisis, the low doc loan paperwork requirements have become more robust but it is still possible to find lenders whose only requirement is for you to sign a certificate that you earn sufficient income to comfortably afford the loan repayments.
After two or three years on a low doc loan, you may be allowed to convert to a full doc loan with minimal financial verification.
If you go for a traditional home loan
Most lenders will ask you to provide two years lodged tax returns, BAS statements, bank statements, or even a declaration from your accountant. They are looking for signs of regular repayment because they want to see that your business has a history of maintaining a level of income suitable to their minimum servicing requirements.
Some lenders assess self-employed applications by using the average of the last two years’ income, while others use a variance strategy or they take the lower of the last two years taxable income.
By planning ahead and discussing your specific needs with your mortgage broker, they can give you an idea of how much you might be able to borrow before the formal application process even begins.