If you’re having trouble getting approved for a traditional mortgage, a low doc (low documentation) loan could be a viable alternative. Here’s how they work and what you’ll need to qualify.
What is a Low Doc Loan?
A low-doc loan is a mortgage product that doesn’t require standard documentation to verify your income. Instead, you can use bank statements, rental income or other asset or income documentation instead of tax returns to prove to the lender that you are able to make loan payments.
Low Doc Loan vs. Full Doc Loan
Both loan products provide the funding you need to purchase a property, but key differences include:
- Down payment requirements: 10 percent or higher for low doc loans and at least 3 percent for traditional loans
- Minimum credit scores: 700 for low doc loans and 620 for traditional loans (or 580 for FHA loans)
- Borrowing costs: higher interest rates and closing costs for low doc loans
Low Doc Loan vs. Alt Doc Loan
Unlike low doc loans, alt doc loans require proof of income. You don’t have to provide pay stubs, W-2s or tax returns, but lenders will want to verify your earnings through bank statements, 1099s or other asset documentation.
Who are Low Doc Loans Best For?
Low doc mortgages are most suitable for borrowers who cannot qualify for traditional home loan products due to the stringent documentation requirements. These include:
- Self-employed individuals who take a lot of write-offs at tax time, making their net income (which lenders consider when applying for a mortgage) too low to qualify for a home loan
- Recent graduates that have only been in the workforce for a short period and have less than a year or two of employment history
- Real estate and stock market investors with irregular income
- High-net-worth individuals with a sizable amount of assets but minimal income (or who are unemployed)
- Prospective homebuyers who’ve experienced a recent decline in income
- Prospective homebuyers who file several tax returns annually as this could raise red flags with traditional lenders
What are the Pros and Cons of Low Doc Loans?
Before applying for a low doc loan, be mindful of the benefits and drawbacks:
Pros of Low Doc Loans
- Your assets may be enough to qualify you for a loan.
- Recent income fluctuations won’t automatically make you ineligible.
- You won’t be required to present tax returns, pay stubs and W-2 forms to the lender.
- The application and underwriting process is generally faster than you’ll find with traditional mortgages, which means your home loan can get approved and funded sooner.
Cons of Low Doc Loans
- Most lenders require borrowers to have good or excellent credit.
- You will likely need a sizable payment and six or more months of reserves to qualify.
- The interest rates and closing costs are slightly higher than you’ll get with a traditional loan product.
- Looking for a lender that offers low doc loans can be challenging.
What Documentation Can Be Used for Low Doc Loans?
The documents listed below can be used when applying for low doc loans:
- Self-verification via Income Declaration Form
- Proof of ABN and/or GST Registration
- Business Activity Statements (BAS)
- Business Account Transaction Statements
- Accountant’s Letter
- Personal Tax Returns
Keep in mind that this list is not exhaustive, and some lenders may accept other financial statements or require additional documents.
How to Get Approved for a Low Doc Loan for Your Property
When you’re ready to move forward, familiarize yourself with the eligibility criteria for low doc loans. That way, you’ll know what’s needed to strengthen your approval odds and can navigate the application process faster.
Find the Right Lender for You
You’ll have to do some legwork to find lenders who offer low doc loans. Or you can start with Angel Oak Mortgage Solutions, a full-service mortgage lender that offers innovative Non-Qualified Mortgage Loans and traditional mortgage products.
Visit their website to explore your loan options and learn more information that may be available to you or to submit an inquiry to speak with a loan originator.
Understand Their Requirements
Not all lenders play by the same rules, so you’ll need to inquire directly to learn more about their specific lending requirements.
Assess Your Credit Score
As mentioned above, you’ll need good or excellent credit to qualify for a low doc loan.
Ensure You Have Savings
Some lenders require you to have 6 or 12 months of reserves for monthly housing expenses (after the closing costs and down payment are accounted for) to approve you for funding.
