Lo Doc & No Doc Loans
What is a lo doc loan ?A Lo Doc (or Low Documentation) Home Loan is a type of home loan that can be approved without the normal income verification requirements. What this usually means is that you sign an income declaration and your bank will accept this as proof of your income without the need to see your tax returns and other financials.
Why do Self Employed people get Lo Doc Loans?If you are Self Employed then you’ll know from experience that the banks see you as a higher risk and tend to be more conservative when assessing your loan application.
They’ll also ask you for the last two years tax returns and assessments for yourself and your business, two years financial statements and may even need to see BAS statements or interim accounts. On the other hand with a Lo Doc loan you state your income on a form and that is it
Simplicity isn’t the only reason to use a Lo Doc. More often the tax returns of self employed applicants do not reflect their true income. A good example is depreciation, which is a tax deductible expense but isn’t actually an out of pocket expense. Some other businesses such as restaurants, taxi drivers, tradesmen or retail outlets receive most of their income as cash which doesn’t always appear in their tax returns. If they were to show their tax returns to the lender they’d be declined.
Who can get a Lo Doc Loan?Self employed borrowers are required to have a valid Australian Business Number (ABN) that has been running for at least two years and is registered for GST. Some lenders do not require that you have an ABN or are ok with ABNs that have only just been registered.
GST registration status is more commonly a mandatory requirement than not, however if the declared income is less than $75,000 then some lenders will accept non-GST registration but this is becoming more an exception to the rule these days.
What is an Income Declaration Form?An Income Declaration Form is a method for the banks to verify your income when applying for a Lo 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. 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.
Every Lender has their own Lo Doc Declaration, so it may vary. Some Lenders will require a Letter from your Accountant to support the level of income disclosed in your application or a lender-formatted Accountant declaration be completed
- Lo doc loan accountants letter (Example 1): Re: John Smith, I have acted as an accountant and tax agent for the above mentioned client since 1/1/2000. The client is involved in the IT consulting industry. The income stated by the applicant, John Smith, on the self-certification form of $100,000 p.a. is gross profit after expenses and before income tax, is considered to be in line with previous financial year’s income level. if you have any further queries please do not hesitate to contact me on 03 1234 5678
- Lo doc loan accountants letter (Example 2): I understand that the Borrower has applied for a loan of $100,000, through ABC Bank, repayable by monthly installments of $416.66 over 30 years at an interest rate of 5% per annum variable interest only. I know the Borrower’s income and expenditure and based on that knowledge and my understanding of the Borrower’s financial position, I am of the opinion that the Borrower is able to repay the loan in accordance within the term and can do so without substantial hardship. I am not aware of any factors which may affect the Borrower’s ability to make the repayments or which may cause substantial hardship to the Borrower to make repayments. I confirm that the Borrower is a registered tax payer with the Australian Taxation Office (‘ATO’) and have lodged their most recent tax return for ATO assessment of income tax.
What is a No Doc Loan ?A 'no-doc' loan does not require an income declaration in the same manner as for a lo-doc loan, nor does it require a borrower to disclose their assets or liabilities. The credit assessment relies purely on the property asset offered as security. An active ABN is usually required but no minimal term of registration is enforced.
These types of loans are becoming less common with mainstream lenders due to the changes to income disclusure requirements and responsbile lending practices, and are more the domain of private funders.
National Consumer Credit Code (NCCP) Update from Gadens LawyersIt appears that no doc lending (ie a pure asset lend) will not comply with the NCCP because the NCCP imposes an obligation to make reasonable enquiries about the borrower’s financial situation and take reasonable steps to verify that situation. It seems that it can never be reasonable to make no enquiries as to the borrower’s financial situation in relation to an NCC regulated loan.
On the other hand, lo doc lending is still possible. What is reasonable has been called by ASIC as scaleable. That means that you need to look at all the circumstances of the case.
In some cases (for example a low LVR loan to an experienced customer), minimal enquiries and verification will be sufficient. There will be some cases where stated income from a borrower, unsupported by an accountant, or from a borrower supported by the accountant will be acceptable.
The emphasis on some cases is deliberate and important. While there will be cases where stated income is sufficient, there will be even more cases where stated income is not sufficient. It depends on the circumstance of the case. This is what ASIC refers to the scalability. The trick is to devise guidelines for when stated income is acceptable and when it isn’t. It will rarely if ever be acceptable not to enquire into and verify income of PAYG borrowers.
The obligation is not only to obtain information regarding the borrower’s financial situation but also to take reasonable steps to verify the borrower’s financial situation. Generally, that will require some positive steps to verify the information provided by the consumer.
Although, these restrictions only apply to loans regulated by the NCC, it’s important to remember that loans which are not regulated by the NCC can be varied or set aside under various legal doctrines. In several cases courts have varied or set aside unregulated loans on the basis that they are unconscionable.