Low doc loans are very popular among people who do not have the right
documentation but still needs to get financed. Low doc loans have become
popular because of borrowers who favour the system of not giving enough
documentation required in traditional loan product. Because of this, the
system has become good option for those who are self employed as well as
independent contractor or investor.
Low doc loans originally used to be provided by lenders outside the
banking industry, but off late, low doc loans are hugely popular among
mainstream lenders and bankers. In fact, low document loans are so
popular that they account for approximately 5 per cent of home loans in
Australia.
Conditions involved in low doc loans
Low doc loans involve a lot of extra costs and certain conditions
which are as follows:
- Compulsory mortgage insurance.
- ABN for 2 years
- BAS statement (after the GFC of 2009)
- Higher interest rate. But, the rate will lower with the amount
of financial documentation you produce.
- Additional and inflated charges and fees.
- Low doc loans have a shorter loan period. Some loan need to be
refinanced after a period of time, sometimes even shorter than 1
year.
Drawbacks of low doc loans
Low doc loans have been widely marketed among people who have
troubled credit history, self-employed people or casual workers who have
weak position when it comes to financial risks involved.
The biggest disadvantages about the low doc loans are the higher
interest rates they involve. If you have a poor or bad credit history,
you are more likely to face high interest rates. When you have a minimal
proof of income, it is better to go for a low doc loan instead of a bad
credit business loan. Because of this, you will be considered to be a
high credit risk or a high probability to be a defaulter. Financial
institution assumes large risk when they approve a no paper loan because
the loan applicants are generally new in the business and are highly
prone to downfall of business in the first year.
The disadvantages of a low doc loan may overshadow your need for it. If
you have well kept financial track records then you are very likely to
get a decent small business loan, which is a better option as it
involves less risk factor and lower interest rates.
Low doc loans - A risk for you and the bank
With low doc loans, there are risks involved both for you and the
bank because most of the time both small business owners as well as the
bank end up doing some profit. The bank will as well make profit from
the interest and the small business owner.
Low doc loans are not non-conforming loans
Often low doc loans are confused with non-conforming loans. Though
low doc loans have some qualities that are common with non-conforming
loans but there is a huge difference between them. In low doc loans, you
do not require to submit income verifications thus making the loan
attractive to self employed. This type of credit approval is also known
as "self verification."
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