The home loan application process can be a time consuming and frustrating exercise for those who do have the documentation required for a standard home loan. For small business owners without a payslip from an employer, this process can be even harder. Luckily, there may be loan options available to you in the form of alt-doc home loans.
If you’ve taken the leap of faith required to start your own business, you shouldn’t be punished for not having the documentation required in a standard mortgage application by the big banks. Alternatively, if you’ve struggled with your credit history in the past but are now in a financially stable position, shouldn’t there be lenders and options available to you?
This is where alt-doc home loans come in. Let’s explore everything you need to know about alt-doc home loans, and which Australians may benefit from one.
What is an alt-doc home loan?
An alt-doc, or alternative documentation loan, is designed to allow borrowers that do not have the standard documentation required for a traditional home loan to still get a foot on the property ladder.
Where full-doc loans (full-documentation traditional mortgages) may require three months of payslips from an employer, a business owner is unlikely to have this same information at hand. Even if their income is higher than the full-time employed borrower, self-employed borrowers may not be able to meet this component of the lending criteria of the application.
Alt-doc home loans are less rigid and allow for – as the name suggests – alternative income proof documentation to verify the borrower can service the home loan responsibly.
Alt-doc home loans are often referred to as low-doc (low documentation) home loans interchangeably. But where alt-doc loans are designed for borrowers that do not have traditional sources of income, low-doc home loans are for borrowers who have next to no income proof documentation. Understandably, this type of home loan is hard to come by nowadays, thanks to changes to responsible lending conduct, and reforms around low-doc loan approval.
What documents are required for an alt-doc home loan?
If you’re considering applying for an alt-doc home loan, it’s worth knowing what income documentation a lender does accept as part of its income verification process.
While the exact eligibility criteria can depend on the lender and your specific financial situation, it generally includes assessing your cash flow through the following:
- Australian Business Number (ABN) registered to the entity
- An accountant’s letter of declaration of your income
- 6-12 months of Business Activity Statements (BAS)
- 6 months of evidence of GST registration
- 6-12 months business bank statements
- 12 months of tax returns
- 3 months of personal bank statements or financial statements
The lender may use a combination of both your business financial and taxation history, as well as your personal banking information, to determine your capacity to service home loan repayments.
Keep in mind that any existing liabilities you have, such as a car loan or even a business loan, may be factored into your application and may impact the loan amount you can borrow.
Who should apply for an alt-doc home loan?
Alt-doc home loans are designed to help Australians with alternative income proof documentation gain approval for a home loan. These borrowers can be investors or owner-occupiers, and are typically:
- Self-employed individuals/sole traders; or
- Business owners – most commonly for small-to-medium enterprises (SMEs).
Additionally, if you have an average to poor credit score, but are now in a more financially stable position, an alt-doc home loan may be one option to consider. Some borrowers will use the flexibility of documentation needed for an alt-doc home loan to bolster their application.
When you apply for any credit product, like a home loan or a credit card, the credit provider will also perform a hard credit check on the applicant to ensure that your credit score is in a healthy range. However, if you have had adverse events in your credit history, like a late payment or default, you are less likely to gain approval for a traditional home loan.
You may be able to prove to the lender you are in a healthier financial position today via an alt-doc home loan.
Are there ‘no doc’ home loans?
In Australia, there are no ‘no doc’ home loans available. It is a component of responsible lending conduct to ensure applicants for credit products can service the repayments. This is for your benefit, as well as the lenders, as you do not want to fall into severe debt by gaining approval for a credit product you cannot afford, such as a high interest credit card or personal loan.
You may want to instead consider a low-doc home loan, which could help those with very limited income proof documentation gain approval for a mortgage. These are harder to come by nowadays but may be worth shopping around for if you are struggling to get home loan approval.
If you cannot meet the lending criteria set by a bank or lender, it may be worth looking at ways to improve your financial situation before you apply for a credit product. This may include:
- Growing a nest egg of savings
- Making all your bill payments on time
- Waiting until adverse events have left your credit file
- Waiting until your business is one or two years old
- Waiting until you’ve left the probation period of a full-time job (if applicable)
What are the benefits of an alt-doc home loan?
The main advantage of an alt-doc home loan is that it allows would-be buyers that do not meet the standard lending criteria of a traditional home loan to have a chance to gain loan approval. After all, if you run a successful small business, why should you miss out on purchasing property just because you don’t work a standard 9-5 full-time job?
By utilising the flexibility of the alt-doc home loan application process, you may be able to gain approval for a home loan much easier than if you applied for a standard loan with a big bank. If you reduce your risk of being rejected for a home loan, this is also a benefit as any credit product rejections will be noted on your credit history. If you’ve opted for an alt-doc home loan due to a history of poor credit, this is important to keep in mind.
What are the downsides of an alt-doc home loan?
For a home loan lender, your application approval hinders on your perceived risk level as a borrower. The facts are that home loan lenders will always view borrowers employed full-time for at least 12 months as the ideal borrower, as there is less risk that this customer could default on their mortgage repayments. After all, you may be the owner of a seasonal business, and there could be times of the year that your cash flow is not as smooth.
Due to this, the following restrictions may be applied to an alt-doc home loan:
- Higher interest rates – Lenders generally reserve their most competitive interest rates for owner-occupier borrowers with low loan-to-value ratios (LVRs). An alt-doc home loan may come with slightly higher interest rates to mitigate this risk to the lender that your income, and the success of your business, could fluctuate.
- Higher fees – Some lenders may also charge higher fees on alt-doc home loans for these same reasons stipulated above.
- Hard credit check – You will still need to meet the criteria of the lender, including the minimum credit score range it could be willing to accept. If you’re opting for an alt-doc home loan due to past adverse events on your credit file, it may be worth speaking to a representative from the lender first to gauge your likelihood of approval with your specific financial situation.
Our alt-doc home loans do not come with a costly monthly or annual fee, so you can keep ongoing costs low. Plus, you’ll gain the flexibility of helpful features, such as an offset account and redraw facility, which may help reduce the interest charged on your mortgage.
For more information about our competitive alt-doc loans, or to speak to an expert for more information, please don’t hesitate to get in touch today.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.