When it comes to applying for a loan, the financial lending industry offers personal, residential and commercial loans of all types and sizes. It is easy to feel overwhelmed with options, figures and definitions that are confusing or unfamiliar.
Are you self-employed? Is your income irregular? Is your income seasonal? Discover the benefits of the low documentation loan, otherwise known as an alternative documentation loan, which may better suit your needs when it comes to obtaining a home loan. Low doc business loans are a flexible option offered by lenders to borrowers (who meet certain criteria) who have irregular income or those who can only provide non-standard documentation.
Low doc loans are a niche lending option, but the increase in independent contractors is growing with an estimated 2.5 million Australian’s fitting that classification as per the ABS. Sole traders and non-employing businesses are growing as well.
In this blog we discuss the following:
- Alt doc and low doc
- Standard loans and alt doc
- Documentation you will need
- Alt doc loan features
Alt Doc And Low Doc Loans
There are 3 terms in the lending industry that we’d like to breakdown:
- Low doc
- Alt doc
- No doc
These 3 lending services differ from institution to institution. Open for interpretation, some may consider them different services, whereas others regard them as the same. At Guardian National Mortgage, our alt doc, and low doc loans are one and the same. No doc loans are only available to corporate borrowers on commercial security.
An alt doc loan means you are providing alternative documentation to support your loan application. This avenue enables borrowers who are without up to date tax returns, financial statements, regular income or standard documentation to pursue tailored lending solutions.
Alt doc loans suit those who are:
- Small business owners
- Property investors
- Contractors or sole traders
Something else to consider:
All loan products will have a set selection of criteria that need to be met for the loan service to be approved. Different loans with have different selection criteria, as such, there may be circumstances where you apply for a full doc loan but are accepted without the relevant documentation.
In these scenarios, the loan is accepted via an exception to the serviceability policy; the lender may approve a full doc loan with non-standard documentation suitable for a low doc loan.
It is important to remember that this exception does not make the full doc loan an alt doc or vice versa. Borrowers must apply for the loan they are suitable for, whether it’s because of loan size, interest rate comparability or documentation they have on hand.
These exceptions are given at the discretion of the lender and shouldn’t be considered an avenue to leapfrog low doc loans and gain a standard loan with low doc loan documentation.
The Difference Between A Standard Loan and A Low Doc Loan
There are many key differences between a standard loan and an alt doc loan. Those key differences include the following:
- Non-standard documentation
- Stricter conditions
- Higher interest rates
All lenders offer different restrictions, features and criteria for their loans — even if they are of the same name. Here we will outline the key differences between standard loans and alt doc loans, though, not all lenders may follow this structure.
Alt doc loans were introduced to the Australian mortgage market for self-employed borrowers in the 1990s. They were Designed to assist Australian’s who didn’t have access to the usual company and/or personal tax returns, often because they were not up to date, for the banks liking. Company/personal tax returns show your history, but they may not reflect on what your income is now, and this is where we can now seek alternative documentation from you, to substantiate your ability to repay the debt.
Since then, low doc loans in Australia offer borrowing capabilities to those who don’t have access to regular documentation suitable for standard loans. We go into the exact alt doc criteria later in the blog.
Low Doc Loan Conditions
Low doc loans are more restrictive than standard loans because of the higher risk alternative mortgage lenders face offering the service. As such, lending institutions will offer stricter criteria for those wishing to apply for a low doc loan.
Low doc loans will come with a number of restrictions due to the risk applied to the loan. These restrictions will likely come in the form of:
- LVR restrictions
- Postcode restrictions
- Loan size restrictions
- Loan exposure restrictions
- Higher deposits
Depending on your lender, you will have access to loans that have a max loan-to-value ratio. The type of loan and lender will influence the max LVR you can access.
There are lenders that will only allow you to borrow up to 60% of the property’s value, whilst others will grant you an LVR of 85%.
Some lenders will require lender mortgage insurance to LVRs over 60% and other charge a lenders risk fee.
Lenders may also place restrictions on the type of property you borrow for or the location of the property. They will often prefer locations in suburbs that have positive housing growth.
Alternative mortgage lenders will often issue a restriction on the maximum loan size available through a low doc loan.
As well as maximum loan size restriction, lending institutions will have a maximum loan exposure restriction. The preference is usually for borrowers who have total debts below $1 million.
A loan deposit can vary depending on the LVR you are requesting, the higher the LVR the greater percentage of the loan you’ll have to pay upfront to get it approved.
When it comes to interest rates, alt doc loans are often given the same features as standard loans. These features will include variable, fixed or split loan options as well as interest only repayments.
Ultimately, it will always depend on the lender for what type of interest features will be included in an alt doc loan. Most institutions will however have higher rates to compensate for the riskier lending.
Low Documentation You’ll Need
Alt doc loans will require you to provide alternative documentation to gain approval for the loan. The requirements for an alt doc loan will vary depending on the lender however most lenders will ask for similar documents.
There are three ways lenders can offer variation in terms of the documentations they require:
- Type of documentation
- Documentation time frame
- Your credit score
Types of Documentation
The most common types of documentation for an alt doc or low doc product will include:
- BAS statement
- ABN registration/history
- GST registration/history
- Accountant’s letter or borrower certificate income declaration
- Business bank statements
These documents are considered standard across the industry with most lenders asking for one or more of them to fulfill an alt doc loan application.
There are, however, non-standard alternative documentation which may include:
- Interim financial statements
- Old tax returns
- Group certificate (PAYG)
- Current letter of employment
Lenders may choose a mixture of standard and nonstandard documentation requirements for the application of a low doc loan.
Documentation Time frame
A lenders discretion will also indicate how far back the documentation needs to go in order to fulfill the application. Typically, statements like an ABN, GST and BAS will require the previous 12 month history of that document.
This is not always the case as some lenders will ask for the last 6 months and other institutions even going as far as 1 day history for an ABN, GST or BAS.
The last area in which alt doc can differ is your credit history. Lenders may categorise their borrowers into ‘prime’ categories such as super prime, prime, near prime and subprime.
These categories will differ from each lender as some only use prime and subprime whereas others will have several categories of credit ranking. Depending on where you fall into the categories you may be offered various benefits.
Some of these benefits will include: only having to provide one alt doc loan documentation, lower interest rates or less fees. Your credit history may also influence which types of documentation you’ll need to provide.
Alt Doc Loan Features
The features available for your loan will depend on the type of loan and the lender. Comparing these features and the comparison rate will all be relevant research in finding the best alt doc loan for you.
Gaining access to an alt doc loan doesn’t mean you have to miss out on a number of features that come with a standard loan. Alt doc loans will typically have the following features:
- Interest-only option
- Fixed interest rates
- Split-loan option
- Line of credit
- 100% offset account
- Ability to make extra repayments
These are the most common features available across the lending industry for alt doc loans.
Alt doc loan lenders do however place limitations on the loan due to the risk associated with the loan. It is common to see the following features unavailable for alt doc loans:
- Third-party guarantees
- Introductory interest rates
- Repayment holiday
- Security substitution