Guide to Sub-Prime/Low-Doc Loans
Low-doc loans, also known as sub-prime loans, are designed for borrowers who find it challenging to access traditional home loans. This quick guide to sub-prime loans outlines what is required for a low-doc application, who can benefit from low-doc loans, and the key things to know about low-doc loans.
What are low-doc loans?
Low-doc loans are designed for those who find it difficult to obtain traditional financing options. These may be home loans, personal loans, business loans, and other type of loan. As the name implies, low-doc loans require less paperwork and documents than traditional home loans.
While a paper application is still required, the evidentiary requirements may be lower. The borrower might not need to provide as much evidence on their income, liabilities, or assets, and/or the lender might accept self-verification for certain criteria. As such, a low-doc loan could be subject to a higher interest rate. However, this may depend on the lender. Additionally, mortgage insurance is often mandatory for low-doc loans.
Who should use a low-doc loan?
Low-doc loans are suitable for those who find it hard to meet the basic criteria for a traditional loan. For example, a family that has trouble saving up for a large deposit could find it easier to buy a house if they applied for a low-doc loan. Those who are self-employed or are employed on a casual or part-time basis might need to use a low-doc loan rather than a traditional loan. Finally, people with poor credit histories who are able to evidence of ongoing income could also be eligible for a low-doc loan.
Types of low-doc loans
There are three major types of low-doc loans. A self-declared income loan is based on the borrower’s declaration of income. For this type of loan, no further evidence of income is required.
Account statement low-doc loans are low-doc loans that require more evidence than self-declared income loans. For example, the lender might require a letter from the borrower’s financial advisor or accountant as evidence of income.
Asset lends require less evidence of income than self-declared income loans. This type of loan is literally a ‘no-doc’ loan. The loan is granted on the basis of the value of the property, and the borrower is not required to provide evidence of income, assets, or liabilities.
Obtaining a low-doc loan
Borrowers should research the different types of loans available and be aware of any additional terms and conditions. Ask the lender about all costs and requirements before agreeing to the loan. Low-doc loans generally come with relatively higher interest rates, so the borrower will want to ensure that he or she is able to make the repayments before committing to the loan. While low-doc loans are probably not suitable for everyone, for some borrowers they can be the perfect solution to financing issues.