It is not easy for self-employed individuals to get loans due to the lack of various documents such as tax returns. The availability of low doc loans with cash out has made things easier. However, there are quite a few things that the individuals should know before getting one.
Understanding Low Doc Loans
Put in simple terms, a low doc loan is basically an investment or home loan which can be taken without providing some of the income verification documents usually required. Some of these documents are pay slips, financial statements and tax returns. The absence of these documents often makes lenders wary about self-employed individuals even if they are capable of meeting the regular loan repayments. Low doc loans have been specially created to cater to their needs.
In order to get the low doc loan, you will have to sign an income declaration form. In it, you will need to state the amount you earn while being self-employed. This is the income used for assessing your loan eligibility.
Can Anybody Use Low Doc Loans?
The fact is that these loans can only be used by individuals who are self-employed. The fact is that these individuals have a legitimate reason for not being able to provide their income information. This will certainly not be the case for employed persons. Therefore, they cannot apply for these loans.
Are No Doc Loans Better?
As the name suggests, you will not have to declare your income or provide information about your assets and liabilities in detail for a no doc loan. Generally, you simply need to declare that you can afford the loan repayments. On the other hand, no doc loans can be very expensive as your credit history will not be taken into account. On an average, you may have to pay up to 6% interest per month or 72% p.a. which is certainly rather high. Additionally, no doc loans are usually provided by private lenders but are still regulated by the authorities.
Revealing Assets and Liabilities
When applying for a low doc loan, you will typically be required to provide the facts about your assets and liabilities. You need to reveal all the details about them in the form. In some cases, it will actually be a part of the income declaration form. Lenders wish to ensure that the assets and liabilities match your income and age before approving the loan.
Converting To a Full Doc Loan
It might be possible to get your low doc loan converted into a full doc loan. However, it depends on the lender you have borrowed from. Usually, you can do so after 2 years as long as you have made the repayments on time. A small fee for the conversion is also necessary.
However, some lenders will ask you to provide full income verification if you wish to convert the loan type. It can also be necessary if you are converting the loan without having a perfect repayment record for the first 2 years.
Getting low doc loans with cash out is not very difficult. However, it is better to know about them properly to ensure that you get the best deal.
Can a mortgage broker find you a better deal on your home loan?
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