Low Doc Loans have seen more reincarnations than Cher in concert! It is now an absolute requirement by law to provide some verifiable evidence for serviceability. Long gone are the days of the ‘No Doc Loan’ where a simple income declaration sufficed. This is largely fuelled by the NCCP responsible lending requirements which has resulted in the most significant change to the low doc lending environment. There are a range of different types of evidence that can be provided to justify income stated, including accountants declarations, business activity statements, tax returns and bank statements.
The main documents that can be used to verify your income if you are applying for low doc loans are:
• 6 to 12 months of Lodged BAS Statements where the lender often uses a formula of between 40 > 60% of Sales as income (depending on type of business)
• An Accountants Letter verifying your income
• 6 to 12 months of Business bank statements where the lender often uses a formula of between 40 > 60% of sales as income (depending on type of business)
• Old tax returns (over 24 months) in combination with current financial statements
What do Lenders look for in assessing low doc loans?
Every lender has different policies, however there are some standard criteria for most lenders.
• Length of ABN / GST registration: You must have an ABN that has been registered (and possibly GST registered if sales are over $75,000). Most Lenders require your ABN to be registered for a minimum of 1 year. With banks who are still operating in the low doc space you will find this is generally 2 years. In some circumstances there are lenders that will accept an ABN registered for 6 months or even 1 day!
• LVR: Some Banks will accept low doc loans up to 60% LVR at standard rates, and some will consider up to 80% LVR on Purchases. Generally above 60% for refinance or cash out requires specialist non conforming lenders who can go has high as 90%.
• Reasonable income declared for the business: Lenders look to see if income and current assets are in line with Business and age. For example an 18 year old courier with no assets would most likely be declined if they declared an income of $200,000 because it doesn’t seem feasible.
• Clean credit: The major banks will not approve a low doc loan with any problems with your credit history. There are however Specialist Lenders that will lend to 90% with credit impairments
• Security: All Funders will take a risk on the applicant but not on the security. Properties that are in non metro or regional areas or unique, in disrepair or difficult to sell are usually not accepted or attract lower than standard LVRs.
• Cash out: Most banks will not allow cash out above 60% LVR and require proof of how the loan funds will be used. Non Conforming Specialist Lenders will however allow cash out generally to 80% LVR.
• Debt Consolidation: Most banks will not refinance an existing loan to Consolidate Debt above 60% LVR. Again, non-conforming Specialist Lenders will allow Debt Consolidation to 80% LVR (sometimes higher)
Advantages of Low Doc Loans:
• No tax returns or assessment notices required
• No financial statements required
• Income Verification is required by Self Certification and Accountant Verification, or BAS Statements or Business Bank Statements or a combination of these.
• Usually a quick turnaround
• Ability to access large sums of equity for further investment purposes
Disadvantages of Low Doc Loans:
• Generally a higher interest rate if loan is above 60% of the property value (LVR)
• Higher Deposit Required
• Higher fees generally – particularly with the non-conforming lenders
What is an income declaration form?
An Income Declaration Form is a method for the banks and other lenders to verify your income when applying for a low doc loan.
Typically, the form will ask you to state your name, your business’s name, your business’s ABN, the amount you are borrowing and the indicative repayments and your income. At the bottom of the form is usually a declaration confirming that you believe that the income you are stating is true and that you can afford to make the loan repayments.
The following details are normally required on the accountant’s letter:
• Must be on the accountant’s letterhead in some instances or on the form provided by the lender.
• Must show the accountant’s full details including ABN, address and phone number.
• Letter must be signed and dated.
• The accountant should specify how long he/she has acted on behalf of the borrower.
• The accountant should also mention that the current financials are not available, but based on their knowledge of the client’s current circumstances, the figure is not an unreasonable estimation of their annual gross income.
• The taxable income the borrower is earning – in some cases.
• A disclaimer to protect the accountant.
In some cases your accountant may not be comfortable signing a letter to verify your income.
There are some options which may make your accountant more comfortable with confirming your declared income.
• Choose a different lender: Some of our lenders have better letter formats than others, which accountants are more comfortable with.
• Include a disclaimer: Some lenders allow a disclaimer to be included in their standard letter format.
• Provide your BAS or Bank Statements: Can you provide your BAS as evidence of your income? Then you will not need an accountant’s letter.
Most banks will require your previous four quarters’ BAS, which equates to twelve months of statements. However some lenders require only two BAS.
This is not an all encompassing rule – however below is a rough guide to how lenders will look at your BAS Statements
• Each quarter’s turnover will be calculated to produce a gross annual turnover. Most lenders will then use 40% of your turnover as your income.
• For example, if your gross annual turnover is $300,000 per annum then lenders will consider using a maximum of 40% of this figure, which means your declared income would be around $120,000.
• However some of our lenders will use 50% of your turnover, which will vastly increase your borrowing power. Some lenders use a different percentage of your turnover depending on the industry that you work in.
• Lenders also look at whether you have made a loss in any particular quarter, in order to see if your income fluctuates significantly.
• In such cases, some lenders may request evidence that you have paid your GST instalment.
Similar calculations are used when assessing business bank statements as with BAS.
If you are self-employed and unable to source a loan via traditional methods, contact the team at Sherlock today to discuss your low doc loan options. With over 12 years experience specialising in low doc loans we are experts when it comes to providing you with the solutions you require.