Low doc or no doc mortgages are financial agreements designed to help people borrow money when they do not meet the qualifications of a regular home loan. A no doc mortgage (low documentation loan) still requires some physical paperwork, but requires far less financial information than their traditional counterparts.
Information regarding proof of reliable income, liabilities and assets does not need to be produced in the same way to get one of these no doc mortgages. This type of agreement relies primarily on the ‘self-verification’ of the borrower, whereby they state their income without verifying it in writing.
Who benefits from a no doc mortgage?
No doc mortgages are primarily designed for people who maintain a saved deposit or some kind of existing equity that makes it hard for them to demonstrate a routine income. This often counts for those who work casually or are self-employed.
They are also sometimes available for those with poor credit histories. They are sometimes wrongly taken advantage of by those who are attempting to hide taxable income from the ATO.
Why use a no doc mortgage?
If you are either casually employed, self-employed or have a bad credit history, a now doc mortgage may be the only option you have for getting the amount you need. As with a large financial choice, careful consideration should be taken before making any final decisions.
Always be aware of what they full repayments will be and whether you are able to realistically afford them. Also be cautious of hidden costs or inflated interest rates as some no doc mortgages will offset the lessened requirement for paperwork with higher fees.
Insurance is commonly required these types of loans, which adds to the overall costs. The majority of these loans will govern up to 80% of a property’s value, although this can different depending on the amount of paperwork you can provide.
Variations of no doc mortgage
There are 3 major types of this loan; self-declared, asset lend and account statement. Each one of these options has different requirements for eligibility.
This is the most frequently seen type of loan, whereby the lender will provide a loan based off a signed statement of the borrower’s income and nothing else. In most cases, 80% of the property’s value is loaned and it can have a higher interest rate than typical loans.
This variation needs to lowest amount of evidence of all and in some cases no signed paperwork or proof of income is needed. This is a loan that is secured entirely around the value of the property itself.
This means that these loans will have the highest interest rates and generally a lower amount of property value can be borrowed.
This requires a more formal type of evidence of your income, such as a signed letter from an accountant. Despite needing more paperwork, the interest rates here are closer to traditional.
Things to be cautious of
No doc mortgages can sound great at first, but you should know everything you can before thinking about using them. Watch out for the following commonalities when dealing with these types of loan.
- Higher interest rates with less paperwork, lower with more
- Additional charges and fees
- Mandatory insurance
- Higher deposits required
- Other security deposits may be required
- Loan periods are shorter
No doc mortgages have some great benefits but are generally only suited to specific types of people who can’t product the paperwork needed for a traditional loan. The added costs and risks that come with this type of borrowing are indicative of the extra risks that lenders take on.