A low doc home loan is an alternative to a traditional, full documentation home loan. The main difference is the amount of documentation that is required. However, it is important to note that there are other differences as well.
Home mortgage lenders generally will determine the interest rate, loan-to-value and costs of the loan with some consideration for the risk associated with extending the loan to the borrower. The fact is that with a full doc loan, the lender can see the borrower’s documented income and assets. This is not the case with a low doc home loan, so these loans are riskier for a lender to make. To compensate for the increased risk, lenders will typically offer a low doc home loan with a higher interest rate and costs as well as a reduced loan-to-value. It is also important to note that lower documentation loans typically will have a faster loan processing and underwriting time.
Traditional home loans may require a borrower to supply a considerable amount of documentation to qualify for the loan. This documentation may include tax returns, bank statements, pay stubs and other related documentation. However, some people are not able to provide this documentation, and others may not qualify for a traditional home loan based on the information reflected in these loans. For example, a self-employed contractor may not show ample income on a personal income tax return for a traditional loan due to all of the tax deductions that he may qualify for. An alternative to consider is a low doc home loan.
How Much Documentation Can You Provide?
If you are thinking about applying for a low documentation loan, you may be wondering how much documentation you must provide. There are a couple of different loans that are categorized as low doc loans. For example, stated income loans may have no income documentation like tax returns and pay stubs required, but assets may need to be documented with bank statements.
There are also stated income, stated asset loans, and these have nominal documentation requirements. Because the type of documentation that is required can vary from lender to lender, it is important to determine what documentation you can provide and to find a loan program that will work well for you. Keep in mind that the more documentation that you are able to provide, the better the loan terms you may receive.
Is This Right For You?
After learning more about what a low documentation loan is, you may be wondering if this is the right loan option for you. Because full documentation loans may take longer to underwrite and close on, it is important to determine if that timeline is suitable for your needs. If you must close on your loan very quickly, it may be advisable to consider a low documentation loan. If timing is not a consideration, you should then consider if you have the ability to provide additional documentation. Most people will be able to provide tax returns, bank statements, and other documentation, but you should consider if the information in these documents will be beneficial for you. If you are not certain about this, you may consider working with a mortgage broker. A mortgage broker can review your personal documentation and can provide you with advice about the best course of action to take.
Low doc home loans are highly beneficial for some borrowers, but they are not the best option for every borrower. Take time to consider the points raised here to determine which type of loan is right for you.