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Low and alt doc home loans

A 'low low' doc or 'alt doc' home loan offer you a mortgage option if you're self-employed.

When you’re self-employed, applying for a mortgage requires more information to verify your income because self-employed borrowers often have more inconsistent or unstable income than a regular salary earner. These mortgages are called low documentation or low doc loans.

To get one of these loans, you need to provide your tax returns, financial statements from your account and bank records.

What’s a low doc home loan?

A low documentation home loan, most commonly known as low doc, offers credit to people who work for themselves and run businesses. These are borrowers who otherwise can’t meet the full documentation mortgage application requirements.Picture not describedLow doc loans use a self-verification system where you can state what you make with a declaration document.

While you won’t have to submit standard paperwork, such as payslips, financial statements or tax returns as documented evidence of income, the lender still does their usual checking of your credit report. They also confirm that you can pay for your mortgage with the income you have stated on your form. As such, lenders may require you to provide an accountant’s letter and bank statements as proof.

Am I eligible for a low or alt doc loan?

Every lender’s policies surrounding low doc and alt doc loans, including their lending criteria, are different, making it essential to read the eligibility criteria before you apply.

It also may be worth seeking the services of a mortgage broker who is comfortable and experienced with low doc loans. A good broker knows which lending institutions are most likely to have pro-self-employed policies and offer competitive low doc loans and which banks and lenders to steer clear of. They also know which lenders allow you to self-declare your income and which ones may still want to see limited amounts of paperwork and documentation to verify your income. This information is essential if you’ve been operating your business for less than two years.

Generally, low and alt doc home loans might suit the following borrowers:

Self-employed New Zealanders

If you are self-employed, you know how much you earn over the year and how much spare cash you have in your budget each month to dedicate to your mortgage repayment. However, if you have only been in business for a few years or your income appears inconsistent because you run your business to be tax-effective instead of turning over high profits on paper. You can benefit from self-certifying that you can service a loan.

Investors

As an investor, you may not have a regular income or employment history if you rely on your investment income. However, if you are in the market for a new investment property, you can use a low doc loan to help make your next investment a reality.

Contract workers

In a similar situation to self-employed New Zealanders, contract workers may work for a portion of each year and then spread their income out over the year. Because of this more irregular income source, you may have to seek a low or alt doc home loan if you’re a contract worker.

Pros and cons of low doc loans

As with any mortgage, self-employed low doc home loans have various pros and cons:

Pros

  • Less documentation: Low doc loans require significantly less documentation to verify sole trader income or business turnover.
  • Faster application process: As there is a low documentation requirement, you save time tracking down your financial statements, tax returns, and other verification from your accountant, which lets you get your application submitted much faster.
  • Convenience: The ability to forego all the mountains of paperwork required to verify a traditional self-employed loan is very convenient for a busy person running a business. If you can find a lender willing to accept a self-certification for your income, this is much easier than providing mountains of paperwork.

Cons

  • Lower loan to value ratio (LVR): Many banks limit the amount of money you can borrow against the value of the home you’re buying or using as security. Instead of borrowing up to 90% of the property value with a 10% deposit, as a full doc borrower can, a low doc borrower may be limited to borrowing 70% to 80% of the property’s value.
  • Higher interest rate: Many lenders view low doc loans as being riskier than fully verified loans. For this reason, they may charge a slightly higher interest rate than a regular mortgage, which is known as a low doc interest rate premium. However, it is possible many lenders can revert the loan over to a full doc loan after a while, as long as you meet all the payments.
  • Fewer lender options: Not every bank or lending institution accepts home loans from low doc borrowers. Aside from this, some lenders still require more documentation than others when verifying a low doc home loan, limiting your options and making it more challenging to negotiate better deals on interest rates.

    What documents do I need for a low or alt doc home loan?

    While you don’t have to show as much evidence, you still need to complete the mortgage application process to receive approval as a low doc borrower, and in many cases, this still requires some documents. For example, a low or alt doc home loan application requires one or more of the following.

    Registered business name and NZBN

    Because a low or alt doc loan considers income made by you through your business, your lender wants information about your business, including your registered business name and New Zealand Business Number (NZBN).

    Self-verified income declaration

    Big banks may ask that self-employed borrowers provide two full years’ worth of financial statements, including tax returns, plus profit and loss statements. If you have other income, such as investment income, the lender may ask you to provide this as well.

    Where you don’t need to provide payslips or tax returns with a low or alt doc loan, some lenders are happy for you to self-certify your income. You sign a certification that you earn sufficient income to comfortably afford the repayments on the loan amount you’re applying for.

    A letter from your accountant

    Similar to the signed income declaration mentioned above, your lender might also require an income form signed by your accountant.

    Previous bank statements

    Depending on what lender you opt for, they may want to see statements from your primary business bank account. They usually request these as far back as six months.

    Can I refinance a low doc or alt doc home loan?

    Yes, you can refinance these loan types. However, qualifying for one several years ago doesn’t mean that you can automatically refinance now. In addition, you may be subject to stricter eligibility and documentation requirements.

    If you’re refinancing to a new mortgage for a better rate, remember that sometimes the easiest thing to do is let your lender know you’re thinking of refinancing and ask for a better rate. In many cases, they’ll give you a discount, saving you the trouble and cost of refinancing.

    Looking to refinance? Find out more here

    How to get your low doc home loan approved

    Perhaps the biggest key to getting any mortgage approved is to find the right lender for your specific circumstances. Every lender has different lending policies, and some are more open to receiving low doc loan applications than others. These policies dictate how the lender views self-employed mortgage applications, which means you risk having your application declined if you approach a bank that won’t be lenient with a self-employed borrower. So the key here is to do your research or contact a good broker who can start you off in the right direction.

    Another consideration for self-employed borrowers is one of the biggest problems they face when applying for a mortgage is their accountant is often too good. Your accountant works extremely hard to reduce your taxable income by writing down a lot of your business expenditure. While this might help reduce how much you pay in tax, it also harms how much you can borrow at the same time. After all, writing down the depreciation on a business vehicle or investment property doesn’t reduce your income regarding how much money you make. It’s more like a paper loss. However, banks rarely see it this way. They assess how much you can borrow based on your taxable income figure and little else.

    If you want to improve your chances of being approved for a self-employed low doc loan, you might want to consider talking to a mortgage broker about your options. This way, you have a far better chance of approaching a lender that welcomes your application and has lending policies in place that are more likely to suit the level of documentation you can provide.

    Questions to ask your lender about low doc or alt doc home loans

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