Low Doc Home Loans for the Self-Employed
Low documentation or Low Doc home loans are becoming a more favourable product amongst self-employed applicants due to the ease and ability to borrow money without the requirement of having to provide company, trust and personal financials.
Low doc home loans are available to small business owners, where tax returns and financial statements are not available for evidence of income. Depending on how creative an accountant can be, I have seen some cases of applicants running multi-million-dollar businesses who have not paid tax for the first ten years. Although this is great from a tax perspective, when it comes to buying a home or investment property, it may not be so great!
These days, lenders are becoming more critical on the assessment of applications, third parties such as ASIC and APRA are being introduced to monitor lenders, and brokers are following strict guidelines. With these changes in place, the hoops applicants have to jump through are becoming harder and harder.
For your typical mother and father who work for employers and don’t have the burden of things such as BAS and GST, there are no real hurdles for them to jump through. But for self-employed applicants who have huge expenses and creative accountants, borrowing money is becoming harder. Changes in the lender’s policies are also providing more obstacles for applicants to ascertain finance.
Two Low Doc Lending Options
Low doc lending provides two primary choices. The first is to offer limited financials such as business banking statements to verify income being received in addition to quarterly BAS statements to confirm that the income is being lodged with the ATO. The second option and the minimum required documentation option is an accountant declaration only.
Considering the first option of providing Business Banking Statements/BAS statements, out of the two options available, this is the more favourable choice of low-doc lenders. The reason being is that it provides the lenders with additional comfort of turnover of the business. The general rule of thumb to work out income in this instance is to take the last 12 months BAS statements, add together the gross sales, then use 40% of this figure as annualised income.
For example, if the business is turning over $1M per annum and this can be verified via 12 months BAS statements, then we can use up to $400K as declared income to service the loan.
The second option for low doc lending which is also becoming limited in its availability is accountant declared income. This option provides the minimum financial information and is simply a one-page document completed by the accountant to confirm a gross figure of income. This figure is then used to service the loan. No other financial information is required.
Given that this type of low-doc lending is considered as a “higher risk” by lenders, some of the rules differ to that of normal lending. Majority of lenders, especially the major banks that offer low doc lending limit loans to a maximum of 60% of the property value. The lenders that provide a higher LVR (Lending Valuation Ratio), in most cases require a ‘risk fee’ or Lenders Mortgage Insurance (LMI) to be included in the transaction to cover them from any financial loss.
In most cases, the interest rates and costs of low-doc lending are higher to that of a full doc because of the higher risk imposed. These fees are calculated based on the overall value of the loan and the total LVR. Currently, Low-doc lenders are offering interest rates as low as 4.5% and as high as 9.99% depending on your circumstances.
If you are looking to borrow a total of $500K and your property is worth $1M, your business has been operating for more than 2 years, and you have 12 months BAS Statements to provide, then you would be considered a lower risk and will be eligible for rates in the same vicinity as full doc lenders.
If you have been operating for less than 12 months, can only provide an accountant declaration and have a 20% deposit, you still have options to be considered, but as you would be regarded as a high-risk applicant, you would be looking at the higher end of the scale regarding interest rates and setup costs.
A Case Study
A self-employed carpenter who purchased a home a few years back when he was completing his apprenticeship and working for an employer with a steady income (PAYG) has since started his own business and gone out on his own. The company is entering its third year of trading, and things are going rather well. He and his employees are working around the clock, and he hasn’t had a chance to complete his financials for the current financial year but has found a property that he’d like to purchase as an investment.
He has managed to save up $150K to use as a deposit and the investment property is on the market for $350-$400K. The applicant’s accountant has lodged his BAS statements for the past 12 months, and the business has a turnover of $800K. Based on this turnover, most lenders will accept a maximum of 40% of annual turnover, meaning we can declare up to $320K per annum.
Although we have the availability to use a maximum of $320K, he confirms that he does not believe he will earn anywhere this amount and advises that $200K would be a more accurate figure. Factoring in the current expenses and other liabilities into the picture, servicing is evident on $200K and given that this falls within the maximum declared income amount, the loan is a strong application and has a good chance of being approved.
I have found that low-doc applicants are generally shocked because they have spoken with other brokers and lenders prior and as they do not have any experience in low-doc lending and base servicing on their previous tax returns which are outdated and don’t provide a true reflection of income, there is little to no chance of getting their applications approved.
Summing up….
Don’t think that because your tax returns haven’t been done or you have fallen behind with your financials that you have no chance of ascertaining finance. I am self-employed myself, and I know it can be challenging to keep things up to date and providing items to your accountant on time is difficult when you have a business to run.
There are workarounds and given that I have experienced difficulty getting lending in the past and have worked with many applicants in the same situation, have learned that on most occasions, there is a resolution. Always get a second opinion and make sure you confirm that the lender/broker you are dealing with has experience in low-doc lending.
Need some help?
Would you like to put my experience and finance network to work to see whether you qualify for a low doc self-employed loan – at no cost and without obligation? Just head to PropertyInvestingFinance.com, complete and submit the online form, and I’ll be in touch with you as soon as possible.
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Great article, Its bizarre how many brokers seem to give up and mainly due to dealing with 2-3 lenders.
But there are always more options.