Australians who are considering low doc loans or no doc loans need to understand some key facts about the loan before opting for this type of funding. Since the loan does not require much documentation, or in the case of an investment property might not require any documented proof, it is convenient for self-employed individuals. By understanding a few key points, it is easier to determine if the loan is right on a personal level.
Self Verification Loan
The first key to understand is that a low doc loan is a self verification loan. This means that the individual is not able to provide proof of income for any reason or have imperfect credit or a low income level. The key is that the borrower is issuing a guarantee that they are able to afford the loan.
Self verification is different from documented proof. The borrower needs to provide minimal paperwork and proof. Instead, he or she is required to sign paperwork giving a guarantee that the funds are possible to repay according to the terms and conditions of the loan.
As a loan that requires minimal documentation, the lender is taking a much higher risk than other lenders. The result is that the lender will charge Australian individuals a higher interest rate than the current averages. This does not mean that the interest will end up unaffordable, but rather that it is higher than average rates. Paying a large percentage of the property will help make the interest rate more manageable.
Some lenders will ask for further security against the loan. This means they will want the borrower to also secure the loan with another asset like a vehicle. Other assets provide the lender with further assurance that the borrower will pay the loan according to the terms.
Low doc lenders often require the use of mortgage insurance to help provide further protection against defaults. Customers are expected to take out the mortgage insurance so that it provides more protection for the lender instead of providing protection for the borrower.
The insurance is another factor that makes the low doc loans possible. It provides protection for the company against the loss if the individual should default or pay for the loan late.
Consumers should expect the insurance to have a reasonably high cost on average. The exact cost will vary between borrowers and the situation.
Banks Issue Loans
While the low doc loans were originally issued by private parties, they are now also available through many traditional lenders as well. Banks and other sources of funding that originally found the loan too risky are now offering low doc loans.
When comparison shopping for different lenders, offering low doc loans; some banks might also give the funding without requiring tax returns or similar documentation. This makes it easier to find a lender who is willing to work with the poor credit rating and limited documentation providing proof that the loan is affordable.
Taking out a low doc loan offers the opportunity to obtain funding in situations when a traditional loan is simply not available. This might relate to tax documents, low credit scores or simply a lack of current income proof due to self employment. By having more options, it is possible to find the perfect loan.
Author: Jacob Pettit is a blogger and marketing and finance expert. He specializes in credit cards and no doc loans. He always tries to help his clients in the best way.