Australian’s are an entrepreneurial bunch with around 1.2 million sole traders in operation and a further 2.1 million small-to-medium sized business owners as at the last census in 2016. Whilst the benefits of running your own business are numerous, there are also some additional challenges that come along with an entrepreneurial life and one of them is getting approved for financing and home loans.
In the past, the process of getting approved as a business owner was not impossible but required applicants to provide a lot more information in order to prove their income stability. This could include proof of assets and liabilities both personally and for the business, multiple years of trading performance as well as a review of the business’s overall plans and strategies.
However, in recent years, many banks have become far more open minded when it comes to assessing the risk of lending to small business owners. Out of this, we have seen a steady increase in the number of ‘low doc’ home loan products that are available from almost every major bank and financial lenders.
So what is a low doc home loan?
Low Doc home loans come in many different shapes and sizes, but the one thing that they have in common is the fact that there is less formalised documentation required to complete the application process. This is ideal for those that are self-employed for a couple of reasons.
1. Simpler applications are less time consuming.
It is no secret that many business owners are very time poor.
2. Less required documentation means fewer hurdles to jump through.
Sometimes being able to get all of the documentation together that is required for a standard home loan application is not possible for a self-employed business owner.
Why getting a traditional loan approved is a challenge for the self-employed?
Some of the documentation required for a standard home loan does not align with the reality of being a small business owner. Banks like to see steady income, along with a certain amount of tenure in your current position. Sometimes this is not possible to provide this as a self-employed applicant as your business income might fluctuate seasonally, or you mightn’t have been in business long enough to satisfy the risk mitigation requirements.
In addition to this, banks will consider all assets and liabilities when assessing your application. If you are a business owner, especially a sole trade and have active finance facilities such as business credit cards or overdraft accounts, these can negatively impact your overall risk profile and potentially prevent you from securing approval.
Low Doc vs No Doc
It is important to point out the difference between a “Low Doc” Home Loan and a “No Doc” Home Loan. Whilst low doc home loans started out as an offering from private lending institutes rather than the big banks, they have gradually made their way into the mainstream. Many major banks offer these products in line with their standard home loan offerings. “No Doc” home loans are far less common, and in a lot of cases are very risky for both the lender and the borrower.
A low doc loan aims to provide an alternate method of approval for those that cannot satisfy the typical requirements of a standard loan application. Whilst there is less, or different documentation required to prove suitability for the product there is still the need to show enough information about your financial standing and credit history in order for the bank to be able to assess you fairly.
“No Doc” home loans on the other hand promise that no documentation is required as evidence to your application, but as with most things, if it sounds too good to be true it probably is. If you are considering either a low doc or no doc home loan application, you should definitely seek independent advice from a reputable mortgage professional to help you understand not only the process, but also the fine print associated with either option.
What do I need to apply for a low doc home loan?
As with most loans you will need to provide proof of identity in order for the bank to gain access to your credit record for review. You will probably also find that banks are wanting a higher deposit for low doc home loans to minimise their risk and exposure should you not be able to make your payments. This is usually around the 20% mark, however discuss the options with your broker to see if you can find the right option for you.
In addition to this, you will also need to provide details of your business’s performance, time trading and future growth plans. A full year of trading along with your tax return will go a long way, however if you are not able to provide a full year, many banks will accept monthly IAS or quarterly BAS statements as evidence of income and expenses.
Wondering if a low doc home loan is right for you?
If you are still not sure of whether a low doc home loan is right for you, reach out to one of our mortgage experts to discuss your current position, why you think a low doc home loan is a better option for you than a standard home loan product and to find out more about the options that are available to you. We have helped thousands of Australian’s through the process of getting approved for their home loans and we can help you too.
Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au
