7 Things You Must Know About Lo Doc Home Loans
Lo Doc home loans rose to prominence in the five years preceding the global financial crisis. That is not to say they had anything to do with the crisis, but it does reflect a change in bank lending practices over the years.
You will no doubt be aware of the current lending practices exercise by major banks and how restrictive they can be when it comes to approving home loans. Although Lo
Doc home loans can still be obtained, the conditions under which they are approved have dramatically changed.
Lo Doc is simply shorthand for Low Documentation, and it is a description of our banks lending policy which means that a borrower is not required to satisfy the normal documentation requirements in their application for a home loan.
Typically, self-employed applicants are required to present at least two years full financials and tax returns to have their home loan application assessed. Many businesses, even prosperous and very profitable businesses, cannot always satisfy this requirement as tax returns are not required to be lodged for up to 9 months after the end of the financial year. This means that many applicants who would normally have had their home loan application approved, will not qualify submit because they cannot resent the appropriate documentation.
Lo Doc loans were introduced to overcome this difficulty. In effect, the bank would allow an applicant to make a formal declaration as to their capacity to repay the loan instead of having to produce tax returns.
Although the bank was taking a risk through this approach, they introduced safeguards to protect their interests.
- Loans are charged at a higher rate of interest.
- Loans are limited to 80% of the value of the property.
- Applicants must produce an ABN number with at least two years history.
- The ABN number must have GST registration attached to it for at least two years.
- The bank insures the loans with a mortgage insurance company.
- Loans are not available for construction purposes.
- Loans had limited cash out provisions and are generally limited to 25% of the total loan amount.
With these safeguards in place the bank’s risk is considerably reduced and in terms of loan performance banks have found that Lo Doc loans have a low rate of default payments.
With the onset of the global financial crisis and the shortage of funds available for home loans generally, Lo Doc loans have become less popular and more restrictive. Many banks now require applicants to show:
- 3 to 6 months bank account statements of their main trading account.
- Copies of all BAS returns.
So although the loans still bear the title Lo Doc, it can be seen that although tax returns are not required, applicants still have to provide substantial evidence of income for an application to proceed.
These conditions demonstrate bank’s reluctance to take a blanket approval approach to Lo Doc home loan applications, especially in the current climate, but as liquidity increases in the financial sector many commentators are predicting the return of these loans to former levels.
