When you are employed and paid wages or a salary you have PAYE deducted from your income and this makes it is simple to ‘prove’ income; however there are many reasons that a self-employed person is unable to prove their income in the manner that the bank requires.
For this reason some mortgage advisers will use low doc mortgages and no financials loans which are more flexible.
Banks Treat Low Doc Mortgages As High Risk
No financials loans are also known as low doc loans or low doc mortgages.
These loans have been around for a while and even the banks started offering these loans prior to the Global Financial Crisis. Most lenders stopped offering these no financials loans when the GFC hit and most have avoided these loans since.
Low doc mortgages are deemed as a higher risk than mortgages backed up with full proof of income; however this is more to do with the unpredictability and vulnerability of a self-employed person’s income rather than any real fault with the process of approving the mortgages.
But there are non-bank lenders that offer specialty loans which include these low doc loans specifically designed to make it easier for self-employed borrowers.
The Loan Criteria Is Different
Low doc mortgages are designed specifically for self employed people.
The term “low doc” means that the documentation required is less than what is required for a standard bank mortgage; however a low doc mortgage still has criteria that will need to be met.
The critical issue for a lender is ensuring that the property offers the lender comfort that they will be able to get their money back should the borrower not be able to meet the repayments. The lender will require a registered valuation from an approved valuer and will typically then allow you to borrow up to 80% of that value.
Some of the finance companies and non-bank lenders will only allow you to borrow up to 70% of the property value. Auckland mortgage advisers can often get the level of borrowing up to 80% as the non-bank lenders feel more comfortable borrowing on Auckland properties.
The other main issue is demonstrating that you can afford the loan repayments.
While the lenders do not require full financials to prove income, with a low doc mortgage they still want you to be able to demonstrate your income. The non-bank lenders all have different methods, but mortgage advisers will be able to advise you on which lenders will suits your individual situation.
To get the best results for you, a mortgage adviser will ask for any financials that you have. A profit and loss from your accounting software, copies of GST returns and recent bank statements and from what you are able to supply they will put together the application. You might think that with all of this information being asked for that the loan is not a low doc loan, but to ensure the best chance of getting your loan approved a mortgage adviser will want to have this information so they can get the best deal for you.
You Need To Consider The Options
Not all low doc mortgages are the same!
When you start looking for any specialist lending there are a range of the non-bank lenders.
Currently in New Zealand mortgage advisers have access to three main specialist lenders; Avanti Finance, Liberty Financial and Resimac Home Loans. These non-bank lenders should be generally be your preferred option for long-term solutions, but not all mortgage advisers are authorised to use these lenders and often we see people using the more expensive finance company options because of this.
The mortgage advisers who regularly do low doc mortgages might also have access to some finance companies, mortgage trusts and solicitor funds where the loan terms may go up to 3-years but the interest rates can be higher and most have high establishment fees. Of course there are times when these loan options may be suitable, but it is always prudent to have a longer term loan than what you might think you require – you can always repay it earlier.
Most finance companies will base lending on the property value (the security) rather than on the borrower’s ability to repay the loan. The finance companies tend to charge high fees and focus on short-term loans of up to 12-months; therefore they become very expensive if you require a longer term.
Some Mortgage Advisers Specialise In This Type Of Lending
Having a good mortgage adviser is important when you need to source a mortgage, and this should be a high priority when you are looking for a non-standard loan like a low doc mortgage.
While you may have a finance broker near you, it may be prudent to use an experienced mortgage adviser to source any specialist finance as they will more likely have more experience with these types of loans and have access to a full range of lenders.
Contact an adviser who can help you with a Low Doc home loan.