Full Doc or Low Doc – What Does This Mean?

When it comes time for the Self Employed to look at taking out a loan, the type of “Income Verification” that they can provide will determine the type of loan that they are eligible for.

If for example they can provide the last 2 years full financials and tax returns they could be eligible for what’s called a Full Documentation Loan or Full Doc Loan.

The main advantages of Full Doc loans are;

* The interest rate can be lower

* The amount of money that can be borrowed, compared to the value of the property to be purchased or refinanced, can be higher (this is called the Loan to Value Ratio or LVR).

What Happens If I’m Unable to Provide Financials

If the Self Employed borrower is unable to provide their financials or tax returns an alternative type of loan is available called the Low Documentation Loan or Low Doc Loan.

As the name suggests, a Low Doc loan requires a lower level of documentation to support the income of a Self Employed borrower.

Effectively, you can declare what your income is by completing an income declaration form.

Lenders may also ask you to provide a Letter from your Accountant, Business Activity Statements (BAS) and Business Bank Statements.

Typically the interest rate on a Low Doc loan is higher than standard rates.

Let’s face it, all decision making in life is about looking at the risk. If lenders are prepared to take a higher risk by lending you money without you providing your up-to-date financials, naturally they can charge a little extra depending on your situation.

Most Lenders require the Self Employed borrower to have an Australian Business Number (ABN) that has been registered for a least 2 years however there are some lenders whose policy is flexible on this time frame.

Lenders will also ask the Self Employed applicant if they are registered for GST and for how long as according to the Australian Tax Office (ATO) if you carry on an enterprise and have a GST turnover of $75,000 or more you must register for GST.

It is therefore important to be registered for GST if the Self Employed applicant is declaring income over $75,000.

You can look at your ABN & GST status at http://abr.business.gov.au/

How Much of My Own Money Will I Need?

The majority of Low Doc lenders limit the Loan to Value Ratio (LVR).

This often means that a larger deposit or higher amounts of equity is required.

This Loan to Value Ratio ranges from 60% to 80%. Also, if the LVR is greater than 60% the loan will then require Lenders Mortgage Insurance.

For example, if you are purchasing a property for $500,000 and the maximum loan amount allowed was 60% of the value of the property, the loan amount applied for would be $300,000.

The borrower would need to provide the difference between the purchase price and the loan amount ($200,000) plus stamp duties, legals etc (approx. $20,000).

A total of $225,000 of savings or $225,000 of equity.

If you are purchasing a property for $500,000 and the maximum loan amount allowed was 80% of the value of the property the loan amount applied for would be $400,000.

The borrower would need to provide the difference between the purchase price and the loan amount ($100,000) plus stamp duties, legals etc (approx. $20,000).

A total of $120,000 of savings or $120,000 of equity.

Most Low Doc loans are available as fully featured home loans or lines of credit but may be at a higher rate than standard loans.

Many lenders will allow Low Doc borrowers to convert their Low Doc loan over to a full-doc loan after a period of time without asking for financial verification.

In most cases this is after two or three years and only if the loan repayments have been made on time throughout that period. Converting the loan over to full-doc can often mean a slight reduction in interest rate.

The Self Employed applicant can be a Sole Trader, a Company or Trust.

If you are self employed and want to buy a property, a car or new business equipment please call me on 0408 648 107.