No doc loans are loans obtained for the purpose of acquiring property in circumstances where your income cannot be verified. There are certain circumstances that are applicable that a no doc loan can be acquired, and these include:
- The loan has to be utilised for business purposes
- It must be secured by a commercial property
- The purpose must be for business purposes (other than in residential property)
- The loan name must be in the name of a company or trust with an ABN
In order to prevent the lender from breaking the National Consumer Credit Protection Act, the borrower will be required to sign a declaration that the property is unregulated by the act, and fulfills the above requirements.
Restrictions on Consumer Credit
No doc home loans are extremely rare in the Australian finance market, due to the crackdown in provision of credit post the global financial meltdown. Previously to the global financial meltdown, lenders were providing finance to people who were unable to afford the repayments on a property, and many properties were subsequently foreclosed as spiralling interest rates and loss of jobs created a huge volatility in global financial systems.
Requirements of No Doc Loans
Governments, in order to prevent more destabilisation of financial systems internationally, and to provide sustainable growth tightened up on lending criteria in banking and finance providers, and to protect consumers from being given unaffordable financial products. This is the reason that no doc loans are rare, and although they are rare, there is still certain requirements regarding the purchase of the property and other sundry features of the loan product. These include:
- The loan to value ratio for a property financed under a no doc loan is generally 65% of the value of the property
- Borrowers are viewed as higher risk and therefore interest rates, charges and fees are generally higher than that of lower risk borrowers
- Non-traditional finance institutions generally offer no doc loans, meaning that their products are generally more expensive than traditional lenders
- Lenders Mortgage Insurance is generally not available for no doc loans which enforces a stricter LVR on the borrower
No Doc Loan Advantages
The advantages of no doc loans are a high level of convenience for the borrower, and a high speed in processing time, meaning that the property can be acquired much faster than a standard process. Generally there is still some paperwork required with a no doc loan, and this would include:
- A signed declaration of your income
- Business Activity Statements
- Recent tax returns
Generally the requirements of a no doc loan vary between lenders, and there is still some minor paperwork required, despite the title of a no doc loan. Low doc loans, as opposed to no doc loans will require bank statements and more detailed information about financial position, meaning that there is more administrative time involved in examining the paperwork and less convenience. Low doc loans are more common in Australia, but the no doc loan offers an option to those who would find it convenient, don’t meet the usual requirements for paperwork and have found a suitable property.
Property Restrictions With No Doc Loans
Due to the nature of the loan, it is generally regarded as only being a short term product, sought for a term between six months and three years, and after that time is meant to revert to either a regular loan, or be refinanced or paid out by the borrower. The other requirements and or restrictions for a security over the property include:
- Postcode restriction on some properties
- LVR restrictions for properties on islands
- Properties in bad condition can be declined
- There are restrictions in off the plan purchases, multiple units on one title, mine areas, flood area and landslip areas
No doc loans are typically 3 times the amount of interest of that of usual lenders, and due to the nature of the product, emphasis is placed on the value of the land or property, rather than the credentials of the borrower. When emphasis is placed on the equity in the property, and the value of the loan is no more than 65% of the entire value of the property, the requirements for the property are still quite strict, as the lender will repossess the property and sell it in order to recoup their costs, should a borrower fail to make repayments.
For Borrowers Confident Of Their Abilities
A no doc loan is good for a borrower who is confident in his or her abilities to make repayments, is looking to get into a property relatively quickly, and desires to fulfil the requirements of the lender, in order to access non-conforming finance. This can be suitable for a range of borrowers in non-traditional circumstances who typically are unable to access regular bank finance for a number of reasons.
No doc loans offer a better choice and accessibility of finance to those who deem it suitable and can ensure for themselves that they have an exit strategy or plan to refinance the property and can service the loan. It also assists in building a credit rating again when their circumstances have previously been unfavourable.