Reasons to Use Low Doc Loans
Low doc loans have been around for a good amount of time. However, people still have no clue what they are or if these loans even exist. Some individuals would benefit from these types of loans, but since they are not that popular, they rely on other banking services that are not quite oriented on the clients’ needs.
What Are Low Doc Loans?
As the name says, low doc loans don’t require too many documents. You don’t need to provide pay slips. Instead, you must provide statements from your accountant or a signed income declaration form.
Low doc loans are also known as alt doc loans or lite doc loans.
It is a flexible lending solution for those who are self-employed (freelancers), contractors or those who don’t work regular jobs and need to borrow money.
This type of loan is oriented towards people who have income and assets that cannot provide pay slips, tax returns, financial statements and other documents as evidence of revenue.
This loan uses a self-verification system, meaning that you state what you earn in a declaration document. That means that you don’t have to give any actual proof of your income. However, the lender will still decide if you are eligible to pay for the loan based on your credit score and other factors.
Depending on the lender and the loan you ask, you may need to provide bank statements and an accountant’s letter. It is best to do the research first. Call the lender or send an e-mail first and ask them what documents you need to provide so that you won’t get tangled in the bureaucracy on your first meeting with the lender.
The Difference Between Home Loans and Low Doc Loans
Low doc loans have a slightly higher interest rate than home loans. This is how the lenders compensate for the increased risk present in the low doc lending process. Do some analysis to see if the interest rate will affect you significantly over time, because if that happens, then the loan will do more harm than good.
The loan to value ratio is another thing you should be checking before signing any agreement. In comparison to a standard home loan, a low doc loan comes with a lower maximum loan to value ratio, which means that your credit will represent up to eighty or even ninety (if you are lucky) percent of your home value.
Unlike other loans, when you apply for low doc loans, you won’t have to provide to your lender your company’s financial reports, tax returns and so on.
When it comes to the bureaucratic part, low doc loans have a great advantage over other types of loans.
Lenders will require an income declaration. That income statement presents all the necessary information and will tell if the client can afford the loan and has the necessary financial resources to pay it back. It is really that simple. However, it is time to talk about the drawbacks a little bit.
The Disadvantages of Using Low Doc Loans
These drawbacks should be known before signing any document with the lender. Yes, there are a lot of advantages of low doc loans, but if you are careful, these disadvantages can mean absolutely nothing to you, and you won’t be affected by them.
There are dozens of cases in which people provide a false income declaration. Why? Because if you have a decent monthly income or even a high one, you are eligible for a better loan. However, a better loan means bigger monthly payments. Those who provide a false income declaration usually don’t think about the consequences.
So, you are stuck paying a loan with money you don’t have. You are also putting your property at risk. If you default on this loan, you will lose your property. It will be auctioned, and the money will cover the loan and then some.
Also, the high interest rate is also something that you should check before committing to this loan. Some say that it is worth it, while others do not. You will need to test the market first before committing to this loan. Who knows, maybe you will find a better deal elsewhere. Research as much as you can.
Low doc loans are the type of services you should check if you are a freelancer, for example. You don’t need to apply for a sub par loan when you can get better value from a low doc one.