What is the difference between a full doc and a low-doc loan? | RateCity

The main difference between a full doc and a low-doc loan is the documentation required by the lender to prove your income and loan serviceability.

A low-doc loan typically requires you to provide less financial documentation to prove your income, assets and liabilities than a standard or a full doc home loan. It is mainly used by self-employed people and small business owners and may be offered at higher interest rates than a full doc loan. 

To verify your income when applying for a standard home loan, lenders generally require you to provide your payslips for the past few months, bank statements, and two years of tax returns. However, a low-doc loan uses a self-verification process to confirm your income details in the form of a signed Borrower’s Income Declaration stating your usual income. 

While each low-doc home loan lender will have slightly different rules and conditions, some of the other documents you may be required to provide when applying for a low-doc loan include:

• evidence of Australian Business Number (ABN) registration;
• proof of GST registration;
• personal tax returns;
• business activity statements (BAS);
• business bank statements;
• profit and loss statements; and/or;
• an accountant’s letter verifying your financial position

Apart from the documentation required to prove your income and assets, there may be a few other differences between low-doc and full doc loans, such as: 

• Low-doc borrowers are often required to provide larger deposits, up to 40 per cent in some cases.
• Some lenders may charge a higher interest rate from low-doc applicants because they assume higher risk by accepting non-standard documentation for income verification.
• In some cases, lenders may place restrictions on postcodes where you can purchase a home with a low-doc home loan, such as in small towns or remote areas.

It’s hard getting a traditional home loan as a self-employed borrower without the standard income documentation required to verify your financial position. In such situations, a low-doc loan can help you get your foot on the property ladder with minimal documentation and a self-declaration stating your regular income. 

On the flip side, you may find a low-doc home loan to be more expensive than a standard mortgage, mainly because lenders perceive you to be higher risk than other borrowers due to the complex nature of your income. 

A higher deposit requirement and a potentially higher than average interest rate are some of the downsides of a low-doc home loan. Some lenders require as much as a 40 per cent deposit. LMI may be needed if you are borrowing more than 60 per cent of the property value. However, having an excellent credit score could put you in a better position to negotiate the terms of the loan.

If you are not entirely sure whether a low-doc home loan is the best option for your financial situation, it may be helpful to seek the expertise of a mortgage broker. A mortgage broker is a home loan expert who could help you find the right type and size of loan for your financial situation. Working with a broker could be particularly useful when applying for a low-doc home loan, as such loans generally have tighter lending criteria, and all mortgage lenders may not widely advertise these options.

A mortgage broker can make you aware of low-doc home loan options from various lenders. They can help you compare home loan products, and even negotiate with mortgage lenders to try and help you get a better offer. Furthermore, a broker could even help you manage your home loan application, which is beneficial if you are time poor and could also help avoid potential hold-ups in the mortgage approval process due to incomplete or missing paperwork.