Non-Conforming Loans, Bad Credit Loan, Unsecured Personal Loan
Low Doc Loans

No two people are alike, so it isn't really surprising that individuals borrowing requirements are as varied as they are. For some, getting a loan from their bank is the solution, but not everyone fits a bank's strict lending criteria and so many people look elsewhere and make use of non conforming loans, offered by more loan lenders. One area of non-conforming loan that is gaining ground is the low doc, or even no doc, loan.

What is a low doc loan?

Low doc loans, sometimes referred to as lo doc loans, have been created to fill a loan gap in the lending market. If you are self-employed, it might not be possible for you to produce all the paperwork that would normally be demanded when applying for a loan – it could be that you are behind on your tax returns, that your actual income is quite different to that shown by your trading figures or that your cash flow is impending your financial health. Another reason for looking for a loan that needs little documentation to approve is that you simply don't want to give all your financial details over to a lender, and plenty of business people have reasons for that.

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What is a no doc loan?

No doc loans, as the name implies, actually require no proof, nor even details about the loan applicant's income status.

How do you apply for a low doc loan?

The need for a quick and simple loan application process that requires a minimum of paperwork has led to the development of low doc loans. Usually with a low doc loan, proving your income with documents such as a tax return is not necessary. However, what is required for a low doc loan varies from lender to lender and some even ask for almost as many documents as a bank would demand for a normal loan. There are 3 main categories of low doc loan:

• Self–declared income – this is where the borrower gives a signed income declaration.
• Account statement – this requires additional back up such as written confirmation from your accountant.
• Asset lend – this is the true 'no doc' loan, as it sometimes doesn't even need a signed declaration or income proof. With this kind of loan, the money lent is secured against the value of the property and nothing else.

Clearly there are different levels of risk for the lender with each of the above types of loan and the interest rates and possible other fees incurred by the loans will reflect that, so be thorough when you check the details.

So how does it work and what is LVR?

Clearly, everything comes at a cost and that is never truer than with loans. You may not have to provide tonnes of documentation to substantiate your income before you get a low doc or no doc loan, but you will have to offer something as security against the loan. Low doc and no doc loans are calculated according to loan to value ratio (LVR) and what this basically means is that the mount of money you can borrow from the lender depends on a percentage of the value of whatever you put up as security for the loan. To put it simply, you divide the amount of the loan by the value of the security you are putting up and then times by 100 to get a percentage LVR, so a loan of 150,000 against a property valued at 300,000 = 50% LRV.

This, of course, is just the quantity of cash that you can borrow and tells you nothing about the rate of interest you will have to pay once you have had your low doc or no doc loan approved. Make sure you know exactly what your repayment requirements will be before you agree to anything binding.

Current LVR rates

Different low doc and no doc loan lenders ask for different LVRs to secure the loans they offer. At the time of writing this, a number of lending companies were approving low doc loans at around 80% LVR. Given that there is a greater risk involved in granting a no doc loan, lenders usually require more assurance before they will hand over money with this type of non conforming loan and again, the most common rate that I found when researching this article was 70% LVR for no doc loans.

Please note that this is just a guideline and that, as with all other things to do with borrowing and lending, it pays to do your own research and find the best rate and borrowing terms that suit you.

Types of low doc and no doc loans

Low and no doc loans are available for a number of uses. One of the most commonly sort is the low doc or no doc home loan. Whilst the no doc mortgage is still around, the recent financial crisis means that this is a pretty expensive form of borrowing. A low doc mortgage is also dearer, though not as expensive as it's sister, the no doc home loan. Another drawback of a low doc home loan is that many of them insist that you get mortgage insurance when you accept the loan. On top of that, many no doc mortgages incur a lot of additional fees and charges, so be careful.

Many people also look into options like low doc leasing or low doc car loans. Again, make sure you are aware of all extra fees and any other terms and conditions that might come with any low doc or no doc loan agreement.

A low doc or no doc loan can be a real lifeline if you fall into certain borrowing categories, but, as with all other things in the money world, they come at a cost. Do your homework and read the small print before you sign anything and hopefully you'll find a low doc loan that's right for you.

We do not claim to represent any Australian bank, lender, or financial institution. Thank you for consulting
this overview on nonconforming loans. Copyright 2008
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