If you’re thinking about buying a new home but have heard that getting a low-doc mortgage loan isn’t as easy as it used to be, don’t worry—it still isn’t difficult to find one. Getting approval for the right mortgage can be challenging, especially if you have little to no documentation of your income and assets to present to lenders.
What Is A Low Doc Loan?
First, it’s important to understand what low-doc loans are and why they might be useful for you. In short, low-doc mortgages allow borrowers with average or above-average credit scores and stable work histories (aka self-employed) to obtain mortgages without having their financial information verified by third parties such as banks or employers. Instead, qualifying borrowers must simply present proof of income and assets using primarily tax returns and bank statements.
Fortunately, there are low-doc loans available that can help you get approved despite not having all the necessary documentation on hand at the time of applying. Before you apply, though, make sure you avoid these three mistakes when choosing a low doc loan, so you don’t find yourself in financial trouble later on down the road.
Doing it for the wrong reasons.
You might be able to borrow more money and pay lower rates if you take out an interest-only or negatively-amortising loan. These loans can be very useful and practical. Still, they should only be taken out for strategic reasons, such as buying an investment property within a limited timeframe in which you plan on selling. If you’re taking out one of these types of loans for other reasons, you could pay tens of thousands of dollars more over your lifetime – especially if interest rates rise. So don’t do it for no reason at all.
Borrowing more than you need
If you think you might need more than 80% of your property’s value in low-doc mortgage loans, you may want to consider borrowing less. This can be especially helpful if you have limited cash reserves and there is little equity in your home. Another great benefit of borrowing less is that you could save on interest payments, as they will be lower with every dollar borrowed. If circumstances force you to take out a large loan against your home—or if it’s worth paying extra for peace of mind—then go ahead and borrow 100% or more. Remember that, once again, those loans will likely come with higher interest rates and additional fees, so do your homework before making any decisions.
Not having an exit plan.
The concept of an exit plan is familiar to anyone who bought stock. An exit plan is all about knowing what you will do with your investment. Will you sell it? Hold onto it? Would certain conditions cause you to bail out of your investment and cut your losses, or will you ride it out even if things get bad? Whatever that plan might be, ensure you have one before taking out a low doc loan. You don’t want to end up in over your head and unable to handle financial difficulties down the road.
However, most of us simply want the lowest possible interest rate and fees in order to get ahead, right? Working with a lending consultant who specialises in low-doc loans can be beneficial in this situation. If you intend to use this type of funding as a stepping stone, you must have a plan for when you will be able to obtain more competitive funding in the future.
