How Difficult Is It To Get A Loan Approved?
Meeting the criteria for having a low-doc loan approved these days is much more difficult than ever before. Loan providers prefer low risk lenders which has had a direct impact on the ability of self-employed individuals having their mortgages approved.
This has resulted in some major changes being made to stated income loans and low doc loans which have been the primary home financing option for the self-employed.
In fact, changes have been so drastic that private financial institutions have entirely eliminated stated loan applications where lenders need to certify their own income.
Low doc loans have therefore become the main and sometimes the only option available for self-employed individuals, besides those short term loan alternatives.
What Are The Requirements For A Low-Doc Loan?
Low-doc loans don’t actually mean that no paperwork is required for a loan to be approved but rather that the loan requirements are not traditional.
Due to the fact that payslip and tax returns cannot be used to determine individual income, other means must be used to accurately assess the income of a self-employed individual. Previous tax returns are not suitable for this purpose as deductions for expenses provide inaccurate figures.
The income verification system for low-doc loans is therefore more complicated. Applicants need to submit bank statements, proof of assets and a Business Activity Statement, all of which need to be verified and certified by a public accountant.
What Are The Additional Requirements for the self-employed?
Applicants need to provide information for a specified period of time which normally means that they need to be self-employed for a period exceeding 2 years.
They need to demonstrate sound accounting and record-keeping practices in order to prove the success of the business. Additional security may also be necessary in the case of unverified income statements.
A credit rating of over 700 and proof of value of assets to the tune of 25% of the required loan amount may be required.
A deposit or down-payment of at least 20% of the purchase price of the property will also be necessary. Emergency reserves to cover mortgage repayments for a period of between 6 and 12 months may also be requested.
Who Qualifies For A low-Doc Loan?
Most self-employed individuals who are able to meet with the above criteria qualify for a low-doc loan. However, this does not necessarily mean that the loan amount will be approved.
All types of financial institutions and loan providers have restricted the approval process due mainly to the impact of the Global Financial Crisis on the industry as well as the increased rate of defaults on these types of loans.
While it may currently be more difficult to receive approval for low-doc loans, it is not impossible for self-employed individuals to obtain a mortgage by taking this route.