Key Takeaways
- Self employed people who want to buy a home often have to deal with unique challenges when they apply for a loan, like having to prove their income in a different way.
- Low doc home loans are good for people who don't have a lot of financial paperwork. They can use BAS statements and letters from their accountant to prove their income.
- Full doc home loans usually have better rates, but they need a lot of documentation, like business financials, ATO notices of assessment, and credit card, savings, and bank statements.
- Full doc loans are great for self employed people who need long term loans and have all the paperwork required for them.
- Low doc loans usually have higher interest rates and an LVR cap of no more than 80% because they are seen as riskier by lenders.
- Once your finances are in order, you can refinance from a low doc loan to a full doc loan. This will let you take advantage of better terms over time.
- You need to carefully look at your situation before deciding between low doc and full doc loans. It depends on your documents, income, and goals.
- A mortgage broker who has dealt with self employed borrowers before can help you find the right loan and lender based on your situation.
For a lot of Australians, buying a house is one of the most important financial choices they’ll ever make. If you’re self employed, the steps you need to take to buy a home are not the same as those of people who work for a company.
There are two main types of home loans for the self employed: low doc home loans and full doc home loans. Different types of loans have different requirements, approval processes, and ideal borrower profiles. In this article, we’ll talk about the main differences between low doc and full doc loans, list the pros and cons of each, and help you figure out which one is best for you.
What Is a Low Doc Home Loan for Self Employed?
A low doc (low documentation) home loan is made for self employed Australians who may not have the usual income documentation that lenders ask for. Borrowers can give other types of proof of income instead of full financial statements and notices of assessment.
These loans may have higher interest rates or loan-to-value ratios (LVRs) that are capped at 80% because they require less paperwork. But for a lot of Australians who are self employed, low doc home loans are a useful and necessary way to get into the housing market.
How Does a Full doc Home Loan Work for Self Employed Borrowers?
A full doc (full documentation) home loan is the standard loan offering available from most banks and lenders. For self employed borrowers, a full doc loan requires a more comprehensive suite of financial documents to verify income.
These documents give lenders a full picture of your financial situation, including your income, liabilities, expenses, and capacity to repay a mortgage. Because of the more robust income verification, full doc loans often offer lower interest rates.
Home Loan Documentation Requirements for Self Employed Australians
Let’s take a closer look at what mortgage documentation for self employed is needed:
Full doc loan documentation:
- ATO Notices of Assessment
- Business financial statements (typically covering 1-2 years)
- Bank statements (typically covering 3-6 months)
- Credit card statements
- Savings account statements
Low doc loan documentation:
- 2 most recent Business Activity Statements (BAS)
- Accountant’s letter confirming income (if available)
It’s important to note that accountant letters are becoming harder to obtain, as many accountants are reluctant to vouch for a client’s future income after being directed to stop writing letters by the CPA Association and their PI insurers.
What’s the Difference Between Low Doc and Full Doc Home Loans?
| Feature | Low doc Home Loans | Full doc Home Loans |
|---|---|---|
| Documentation | Limited (BAS, accountant letter) | Extensive (NoA, financials, bank, credit card, savings statements) |
| Approval Speed | Faster (less paperwork) | Slower (more verification) |
| Interest Rates | Typically higher | Usually lower |
| Maximum LVR | 80% | Can be up to 90%-95% |
| Ideal For | Recently self employed, variable income | Long-term self employed with stable income |
Lenders view low doc borrowers as higher risk, hence the higher rates. On the other hand, full doc borrowers benefit from lower rates and more competitive loan products.
Pros and Cons of Low Doc Home Loans
Low doc home loans are a good option for self employed people who may not have all the traditional financial documents they need. These loans can help you buy a home, but they also come with some important trade-offs that you should think about.
Pros:
- Flexible documentation requirements
Less paperwork is the best thing about it. You can qualify with recent BAS statements and, if you have one, an accountant’s letter. This will help you avoid the stress of getting all of your financial documents together. - Accessibility for the newly self employed
Low doc loans are a way to get money for your business without having to wait for a year of income history. - Helps those with non-standard income streams
If your income is not steady, comes from more than one source (which is common for self-employed people), or is seasonal, a low doc lender may be more willing to work with you.
Cons:
- Higher interest rates
Low doc home loans usually have higher rates than full doc home loans because lenders think they are more risky. This makes them less affordable in the long run. - Maximum LVR Limits
Most lenders won’t let you borrow more than 80% of the value of the property (the Loan-to-Value Ratio, or LVR). - Limited lender options
Not all lenders offer low doc products, so it’s a good idea to get help from lending experts like Dark Horse Financial to find a good lender and get the best deal.
Pros and Cons of Full Doc Home Loans
Full doc home loans are the most common type of mortgage in Australia, and they usually have the best rates and terms. But like any other loan, they have their own pros and cons, especially for self employed people.
Pros:
- Lower interest rates
Lenders can more accurately assess your risk because they can see all of your financial history. This usually means that the interest rates on these loans are much lower than on low doc loans. - Access to more lenders and products
With full documentation, you’ll have access to more mortgage options, including major banks and non bank lenders. - Lower LVR Requirements
You may be able to borrow up to 90–95% of the property’s value with full documentation.
Cons:
- More documentation required
Full doc loans require a lot of paperwork, like tax returns, notices of assessment, and financial statements, which can take a long time to get together.
- Potential scrutiny of business performance
Lenders may look at how profitable and stable your business is, which can be a problem if your finances have been unstable lately.
Which Is Better for Self Employed: Low Doc or Full Doc Mortgage?
The better option depends on your own financial situation, how long you’ve been self employed, and what documentation you can provide.
A full doc loan might be better if:
- You’ve been self employed for two or more years.
- Your income is stable and well-documented.
- You have recent financials and notices of assessment.
- You want access to lower interest rates.
A low doc loan might suit you if:
- You’re newly self employed and you don’t have tax documents or financials yet.
- Your income is seasonal or variable.
- You have strong business performance but limited formal documentation.
- You need to act quickly.
A qualified mortgage broker can assess your situation and recommend the most suitable lenders and loan products based on your documentation and goals.
Is a Low Doc Loan Riskier than a Full Doc Mortgage?
Yes, from the lender’s point of view. Because there isn’t a lot of financial information available to look at, low doc loans are riskier. That’s why they usually have higher interest rates and lower LVR limits.
But for the borrower, a low doc loan is only risky if you go too far. It’s very important to be honest about your income and make sure you can easily pay back what you owe.
Can I Switch from a Low Doc to a Full Doc Loan Later?
Yes, and many self employed borrowers do just that. Switching from a low doc to a full doc loan,referred to as refinancing, is a common strategy once you’ve established a more consistent income history and have the required documents.
Benefits of switching include:
- Lower interest rates
- Access to more flexible loan products
- Better loan terms (e.g. reduced fees, offset accounts)
- Potential to reduce or eliminate Lenders Mortgage Insurance (LMI)
Refinancing also gives you the chance to consolidate debts or free up equity for other investments. It’s worth reviewing your loan yearly to check if it still meets your needs and that you’re not paying more than necessary.
Tips for Self Employed Home Loan Applicants
- Work with an accountant: A good accountant can help you structure your finances in a way that supports your borrowing capacity.
- Use a specialist mortgage broker: Brokers like Dark Horse Financial are familiar with self employed borrowers and can recommend lenders who are more flexible or who offer competitive low doc and full doc products.
- Avoid over-declaring income: Honesty is key. Inflating your income could cause repayment issues down the line.
- Plan ahead: Start collecting the needed documents at least 6–12 months before applying, especially if you’re aiming for a full doc loan.
Final Thoughts
If you’re self employed and want to buy a home, it’s important to know the difference between low doc and full doc home loans. Full doc loans have better rates and features, but they need a lot of paperwork that not all self-employed borrowers can provide. Low doc loans are a flexible option, but they come with their own pros and cons.
Knowing your options can help you go through the application process more smoothly and successfully. To make smart financial choices and get the most out of your borrowing, you should always think about getting professional advice.
Disclaimer: Loans and their accompanying benefits are available only to those who qualify for them and have been approved. Though we put a lot of care into writing this article, the information presented within is general and doesn’t consider your unique situation. It is not meant to serve as a substitute for professional advice, and you should not rely on it solely for any major financial decisions. You should always consult with a professional when you’re dealing with finance, tax, and accounting matters.
Find the Right Self Employed Home Loan for You
Dark Horse Financial can help you get the best rates and terms from a lender who can approve your loan in the time frame you need. Get in touch with our team to get started if you want to get a home loan.
