Not everyone is a typical pay as you go (PAYG) or salaried employee. If you’re self-employed or your circumstances are out of the ordinary, there may be options available to help you into your first home.
When you apply for your first home loan, lenders want to see evidence of your income — for many people, that means providing pay slips and other financial statements. But what if you’re self-employed and don’t have regular documents to prove your income?
The good news is that if you run your own business it can still be possible to buy a home using a low doc loan. Similarly, if your credit history is lacking, you might be able to apply for a non-conforming loan instead.
Low Doc Loan
Low doc loans are especially designed for self-employed workers, who often can’t provide traditional proof of income like regular pay slips. The term ‘low doc’ doesn’t necessarily mean you have to provide less evidence of your income — rather, it’s all about providing different types of evidence of your income.
Not every lender offers low doc loans. Those that do might ask for a larger deposit or a higher interest rate. You can book an appointment with a Finance & Mortgage Broker to explore options and compare rates.
No Documentation Mortgage
No documentation mortgage (no doc) is a kind of loan that does not require the borrower to produce any proof of income or existing assets.
Generally, while giving out a loan, banks and financial institutions check the creditworthiness of the borrower by examining their bank statements, tax returns, and any other document which acts as a verification of income.
Creditworthiness is the ability of borrowers to repay their loans with interest. No Doc loans, on the other hand, are unregulated contracts that only require the borrowers to declare their ability to afford loan repayments.
Summary
- No Documentation Mortgage (no doc) is a kind of loan that does not require the borrower to produce any proof of income or existing assets.
- Applicants with volatile incomes such as self-employed individuals, and people who live off on commissions or tips, usually opt for the no doc method of securing loans.
- No doc loans are a constituent of the class of mortgages termed “subprime,” and they are one of the many culprits behind the asset market collapse and subsequent financial crisis of 2008.
Kind of Debtors Opt for No Documentation Mortgage
Applicants with volatile incomes such as self-employed individuals, and people who live off on commissions or tips, usually opt for the no doc method of securing loans.
Due to the high risk associated with no doc mortgages, lenders charge a higher rate of interest. Moreover, lenders only extend no doc mortgages to clients with very high credit scores and high liquidity in the form of cash balances.
These loans also require a higher down payment to be made, mostly in the range of 30% to 50%, as opposed to 20% or lower in conventional mortgages.
No doc mortgages come under the Alternate-A or Alt-A category of loans, which have a relatively high-risk factor. According to the risk profile, Alt-A comes between prime (high credibility, low risk) subprime (low credibility, high risk) mortgages.
Besides no doc, alt-A includes low documentation mortgages, no income-no mortgages (extended to borrowers who need to verify only their employment status), and NINJA loans (for borrowers with no income, no job, and no assets).
No Doc Mortgages vs. Other Loans
A no doc mortgage has the same benefit of other types of home loans: It helps you borrow the money you need to acquire a property. However, the terms and credit requirements needed to get approved for a no doc mortgage are different. Simply put, no doc loans require higher credit scores and larger down payments.
| Conventional loan | FHA loan | No doc loan |
| 3% down payment | 3.5% down payment | 30% or more down payment |
| 620 credit minimum | 580 credit minimum | 700+ credit minimum |
| 3.170%* average interest rate | 2.730%* average interest rate | Varies, but expect to pay several percentage points higher than conventional loans |