As a self-employed person or a business owner who wants to get a home loan, you would be required by your lender to provide paperwork or documents like statements of accounts, tax returns, W2 forms and more. You might start wondering the reason why they are requesting for such an extraordinary amount of paperwork, the reason isn’t farfetched, they’re trying to determine the best mortgage that suits you.
In a situation where you don’t have these documents they require, all hope is not lost as you can still qualify for a low-documentation (or no-documentation) loan.
Before the economic meltdown in 2008, qualifying for loans was easier, all you had to do was tell the lender how much you earn with little documentation. Now things are a little different, you’re required by the Consumer Financial Protection Bureau (CFPB), that you must have the capacity to pay back the loan. It is also compulsory if you’re self-employed, that you must be in the same industry for at least a year, this will be backed up by a certificate of incorporation or your ABN. Even with this restrictions, there are lenders who are willing to work around this by checking and ensuring you have traditional assets.
Why people choose Low Doc Loans
- Some self-employed people would rather not show their real income, they choose to show a lesser income than they earn, this works against them when applying for standard loans.
- People who just started work with no history or those that earn low wages also sometimes prefer to go for low doc loans as many finance professionals seem to suggest it works in their favour.
- Young entrepreneurs and new business owners who have not consistently generated cash flow over a period of time.
- Retirees with investment income.
- Some people are not comfortable with sharing their income with others.
- Gathering, sorting and organising documents for some is a herculean task.
- Some lenders or mortgage brokers may not accept the way some documents are tendered by borrowers.
What are the things you need to qualify for this kind of loan?
- Good credit: lenders will be willing to talk to you if your credit score looks good, before they’ll overlook the fact that your documents aren’t complete or in order, your credit score will serve as the pointer that will show your standing.
- Assets: having assets like deposits in investment accounts that’ll serve as backups or reserves that you can fall back on to keep payments going, will make lenders comfortable to offer you loans. It's more common for a commercial business to have these quality assets which makes low doc business loans a lot more common, visit this site for more information.
- Income: good and stable income helps in getting a loan approved even in a situation where you don’t have your W2, when your income has been evaluated and it meets the lenders criteria, your loan could get approved.
- Equity: making a large down payment will give lenders more confidence and also minimise the risks they’re taking, this will increase your chances with low doc lenders.
The lenders are taking majority of the risk by giving a loan with little documentation, not only is their investment at risk, they are also working in the grey areas of the law (though their actions are still legal), because of this reason, interest rates are a tad higher for low doc loans. The rate is usually one percent but it could differ from lender to lender, processing fees could also be inflated.