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For some people, buying a house is comparatively easy – they find a place they like, research their mortgage options, and approach a bank, mortgage broker or other type of lender for a home loan. But this is not the case for everyone. Not everyone can produce all the paperwork that is regularly expected for a standard mortgage loan. If you run your own business or are in some other way self-employed, your tax returns might not be up to date at the time of your home loan application. Any small business owner can tell you that cash flow can be a nightmare at times and can adversely affect the company's overall financial well being. Other will confess that sometimes the true amount of money going through a business can be quite different from that shown by the trading figures. In other cases, not every individual is totally scrupulous about declaring how much money they earn often for personal or tax reasons. People maybe living off of investments that they don't wish to declare or wish to keep their true financial status to themselves whilst they settle a divorce. And occasionally, how someone got their money in the first place might be best for them and them alone to know – remember that criminals need mortgages too.
Clearly, this is quite a varied cross section of society, and they are all searching for a way to secure a mortgage with no conventional way to achieve their goal. This is where the low doc or no doc mortgage comes into play. As the name implies, a low doc loan usually requires a minimum of documentation, though it can vary from borrower to borrower and some lenders seem to ask for as much written proof as any bank would. Low doc home loans and no doc mortgages usually fall within the flowing boundaries:
1. Self-declared income – to secure this kind of loan, the borrower has to provide a signed income declaration.
2. Account statement (lite doc loans) – this requires a little more than just an income declaration, like a letter from an accountant giving verification.
3. Asset lend (no–ratio loans) – where the money is borrowed against the value of the borrower's assets, and usually, that alone – a real no doc loan if ever there was one. This kind of home loan often relies on a good credit rating.
4. No doc/NINA (no income no asset verification) mortgages – these are not common in Australia. They can only be granted to those with a very high credit rating (often the super rich) as no income nor asset and liabilities paperwork is demanded. Potential customers tend to be those who value their financial privacy highly and are happy to pay to keep it that way.
LVR explained
You rarely get something for nothing in this world and that is never truer than in the domain of loan lending. Firstly, if you want (or have) to apply for a home loan with little or no paperwork attached, you'll need something to offer as surety. To calculate out how much you can borrow, you need to work out the LVR, or loan to value ratio, where the amount you borrow is a percentage of the value of the assets that you offer to guarantee the loan. To find the percentage LVR, divide the value of whatever you are putting up as security into the loan amount and multiple by 100. For example:
A loan of 160,000 secured by assets valued at 320,000 = 50% LVR
The LVR varies from lender to lender. For a low doc mortgage loan, an LVR of around 80% seems to be common at the moment. Obviously, no doc home loans carry increased risk for the lender, so they want a larger bite of the cherry and often seek as much as 70% for a home loan.
A few words of caution
The LVR only indicates how much a loan lender might be willing to give you and nothing about how much that loan could cost you. Due to their slightly unorthodox nature and the higher lending risk that they represent, both no doc and low doc loans come at higher interest rates than more conventional home loans. Indeed, as a general rule of thumb, the less paperwork the home loan demands, the steeper the interest rate.
Due to their prized convenience, no doc mortgages often entail various extra fees and charges that may or may not be apparent at first glance. Make sure you check all the details of the home loan before you agree to anything.
There are rumours floating around that the days of low doc and no doc home loans are numbered, so if you are interested in this type of mortgage, keep an eye on the latest financial bulletin boards and business pages, or you could miss out.
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