A low documentation loan can be helpful for borrowers who don’t have adequate records or credentials to secure a traditional loan. This includes borrowers who are self-employed or borrowers without sufficient financial records like tax returns or satisfactory proof of income. The prerequisites for this loan, such as down payment amount required, are often steeper, as is the interest rate. Additional fees, depending on the lender, are typically charged to mitigate risk in low or no documentation scenarios.
More About a Low Doc Home Loan
A low documentation home loan (“low doc”) is an attractive alternative for some potential borrowers who may not have adequate or complete records that would be needed for the traditional loan process. Borrowers who are self-employed or who have a similar employment situation may not have adequate documentation, such as detailed payment history or comprehensive tax records, which could make securing a standard home loan difficult. A low doc home loan has more lax paperwork requirements, allowing these potential home buyers access to the housing market.
Advantages of Low Doc Home Loans
The key advantage a low documentation home loan is the less stringent amount of documentation required by the bank during the loan process. This type of loan is aimed at a specific type of borrower: the prospective home buyer who, for one reason or another, cannot provide the sometimes intricate documentation and records required for other types of home loans. In addition to this type of loan, there are also “no doc” home loans, which are a benefit to buyers who cannot provide any type of documentation at all. Rather than provide complete documentation, or any documentation at all, low- or no-doc borrowers state their income through a process known as “self verification.” For more information on the process of applying of a low-doc or no-doc home loan, please fill out the contact form below.
Disadvantages of Low Doc Home Loans
The main disadvantage of these home loans, which are more lax in documentation requirements, is that they cost more. Low doc and no doc loans are seen by the bank as risky, so higher interest rates and fees are charged in this situation. As the amount of documentation goes lower, the fees go up. Lender’s mortgage insurance is typically required in low- and no-doc situations, as well. Again, insurance is higher in no-doc than in low-doc situations. Higher rates, fees and insurance mitigate the risks and make it worthwhile for the bank to take this chance.
Another drawback to low doc and no doc home loans is the lower amount that can be borrowed and, consequently, the higher amount needed for a down payment. Banks usually cap low documentation loans at 80% of the home price. Some cap the amount that can be borrowed at 60%! Again, this is to lessen the risk to the lender and to ensure that only the most serious and financially-stable low-doc borrowers can qualify.