Getting a home mortgage generally involves the applicant putting together mountains of paperwork and places under the microscope every facet of their financial position. Applicants in steady employment always fare best with traditional lenders. Self employed persons, people on a pension, professional investors and anyone else whose financial position is ‘unusual’ and income ‘irregular’ tend to not meet the bank qualifying criteria.
Low-Doc and No-Doc mortgages are also known as “non-conforming” loans. This is because they cater to applicants who do not conform to the borrowing criteria applied by traditional lenders.
In Australia, the value of low-doc mortgage approvals is on the increase even though the value of total housing loan approvals has been broadly flat. As a result, while low-doc loans are estimated to account for only around 5 per cent of all outstanding housing loans, their share has been rising. These loans are currently estimated to make up just under10 per cent of all new home loans.
The rapid growth of this market has occurred alongside increased competition. Initially, low-doc loans were marketed only by specialist non-bank lenders, but in recent years mainstream lenders have also entered the market. Some smaller banks, in particular, have targeted this segment. The major banks were slower to enter the market, but they have recently begun to actively promote low doc and even no doc products.
The most common users of Low Doc and No Doc loans are:
• Small business owners;
• Self-employed ;
• Seasonal workers;
• Persons who do not have recent tax returns ;
• Short-term employed;
• Pensioners;
• Investors with dozens of properties;
• Contractors.
Low Doc and No Doc loans enable someone whose financial position does not fit the traditional lender mould to finance a house which they know they can afford.
When applying for a Low Doc mortgage the lender may still ask about your income and asset and liability position. They will also check your credit history. Unfortunately most lenders in Australia will not consider a Bad Credit Low Doc or No Doc home loan. Low Doc Loans often require a letter from the applicant’s accountant to substantiate the income declared on the mortgage application. No tax returns or financial statements are required.
With a No Doc Mortgage (also known as “Asset Lending”) you do not need to provide any financials or income statements. What is required is for the borrower to have a stronger asset position than the traditional full-doc applicant. With No Doc mortgages the lender is agreeing to provide funds based on the strength of the applicants asset position only.
Both Low Doc and No Doc loans are perceived in the lending market as being of a ‘higher risk’ than the full documentation mortgages.
Lenders do not like risk. The riskier they perceive a loan to be the more interest the borrower is likely to pay. Consequently Low Doc borrowers tend to incur a marginally higher interest rate than the full documentation, traditional borrowers. The No Doc Borrowers, for the fact that less information is provided on their financial position – pay a still higher mortgage interest rate.
Furthermore the riskier the loan is the less Loan-to-value ratio the lender will be prepared to advance. While first home buyers in the Australian loan market are now offered home loans that go up to 106% of the value of the property they are looking to buy – this is not available with Low Doc or No Doc loans. Generally most Low doc home loans will go up to 90% of the property value, while in most cases, No Doc loans will not go beyond 75% of the property value.
Nonetheless Low Doc and No Doc mortgages offer a fantastic opportunity to numerous Australians to either purchase their home, or if they like, build up a whole real-estate empire. The later is just about impossible using a full doc mortgage. While many of us start out as full documentation applicants. Those that would like a future in real-estate investment will eventually need to seek finance through the non-conforming market.
If you are interested in Low Doc or No Doc Mortgage opportunities available in the Australian Lending Market please visit :
www.webdeal.com.au or
www.honeyloans.com.au
Maya Pavlovski holds a Bachelor of Commerce degree from Melbourne University and is a qualified CPA.
Sphere: Related Content
If you enjoyed this post, make sure you subscribe to my RSS Feed