Low Doc and No Doc Loans - What are they?

You should never apply for a loan if you are not sure you are able to meet the loan repayments, taking into account any likely interest rates rise in the short to medium term.
Defaulting on a loan can result in bankruptcy which can ruin your credit history, resulting in your not being able to borrow money, and your assets being seized and sold. You should also be aware that if you borrow 100% of the property price there is a possibility that you may not pay off the loan in your lifetime, and your debt would then be taken from your estate, in the event of your death.

Low documentation can be a real advantage, as you have much less paperwork to fill out. You would obviously need less time gathering information. There are however certain tax requirements with low doc loans. The Australian Tax Office reported in 2005 that they were investigating ‘whether people using low documentation loans were likely to have tax compliance issues.’

The ATO had found that that some people with low doc loans either understated their income or failed to lodge tax returns. They are investigating 350 taxpayers selected at random from eight lenders to ‘get a picture of the broader population using these products.’ So if you are unsure about your tax obligations it is important to keep proper records and obtain tax advice if necessary.

A No Doc loan is for people who are unable to provide any documentation substantiating their income, assets and liabilities. The asset-rich self-employed may not be able to prove significant income, but the assets may be sufficient security as they can sell these to obtain capital. People with poor credit histories may be eligible for No Doc loans. As the name applies there may be no paperwork for No Doc loans.

Financial institutions offering these products need to have some way of deciding which applicants to approve. One method is the Loan-to-Value Ratio (LVR) that is a ratio of the loan amount to the current value of the property. The LVRs are typically in the range of 60-80%, which means borrowers may need to find some money themselves.

The LVR can also determine how much you can borrow. Low Doc and No Doc loan amounts can be in the millions of dollars. Some residential low doc loans at 80% LVR can be high as $1.5 million, but at 60% LVR can be $3 million. No Doc loans can be up to $1 million at 55% LVR.

The market for Low Doc and No Doc loans is very competitive, so check with your mortgage broker, who may be able to find a range of lenders with good rates. For more information on Low Doc and No Doc loans go to http://www.creditworld.com.au/non-conforming-loan.html.

Summary

• Low Doc and No Doc loans are for people who cannot get conventional loans.
• They are suited to the self-employed and those with credit history problems.
• No Doc loans may require no paperwork, and no proof of income, assets or liabilities.
• If you do not pay off the loan in your lifetime, the debt will be taken from your estate.
• You must keep proper tax records and seek advice if necessary.

Article correct at its author date: Dec 2006. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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