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Alternate Documentation Loans: The Common Misconceptions

08th Oct, 2021 | Articles, Self employed

In this article:
Here's a quick guide on Alternate documentation loans - what they are, how they work and some common misconceptions associated with them.

Every borrower has unique circumstances and different requirements when it comes to getting a home loan. Some people have an impeccable credit record, and therefore are looking for the most competitive rate in the market. Some are self-employed professionals or small business owners who can’t meet the strict lending criteria most lenders have set. It’s often the case that you have the requisite financial stability, but are simply not able to produce sufficient documentation to meet the stringent requirements set by the lender for a regular home loan.

This is where Alternate Documentation Loans (alt-doc loans) may be a solution. Alternative Documentation Loans are designed for people who don’t have the required documentation that most lenders require. Alt-doc loans are potentially a viable option for you if you can offer collateral in lieu of traditional documentation requirements.

Alternate Documentation Loans Explained

Alt-doc loans are generally designed for individuals who lack consistent proof of income (like payslips) to provide a lender looking to assess an application for a home loan. By applying for an alt-doc loan, you can provide the lender with alternative documentation to show the lender you’re capable of servicing the loan repayments. Some common examples of alternative documents include tax returns, annual business statements and bank statements.

Alt-doc loans most are most commonly utilised by self-employed professionals and small business owners but can also be of help to individuals who are unable to provide the required Documentation for a regular home loan. The requirements for an Alt-doc-loan vary from lender to lender.

They are different from regular home loans

There a two key factors that distinguishes a traditional home loan from an alt-doc loan:

  1. Eligibility Criteria: Regular home loans have robust documentation requirements, often requiring an applicant to provide three months of payslips or two years of tax returns. For alt-doc loans, lender criteria varies, but most will often consider just three months of bank statements and six months of business activity statements.
  2. The interest rate: Alt-doc loans ultimately carry a lot more risk in the eyes of a lender, than a regular home loan. The natural result is that most lenders charge the borrower a higher interest rate than compared with a regular home loan.

Who are they right for

First, please don’t just assumed that because your self-employed or a small business owner that you must go with an alt-doc loan. If you have a solid credit rating and can provide two years of tax returns, then you can still qualify for a regular home loan. The circumstances when an alt-doc loan should be considered include:

  1. If your business activity has surged recently. Your income might be growing, but only in recent months, and you might be looking to acquire a larger loan. Applying for an alt-doc loan might suit you because a regular home loan application will consider your income over the past two years, which can lead to a loan amount that doesn’t match up with your latest income.
  2. One of the more common reasons for an alt-doc loan will be a lack of the required documentation, such as two years of up-to-date tax returns or if you have no six month history of personal or business bank statements.
  3. If you’ve had a blemished credit record but have managed to bring expenses under control and are looking for a loan, then several lenders may be willing to reconsider you suitability for an alt-doc loan based on your recent expense habits.

What documents will you need?

As always, the required documentation will depend on which lender you apply through, but some standard requirements include:

  • Australian Business Number (ABN) registration for your business
  • An accountant declaration of your income
  • Six months of Business Activity Statements (BAS)
  • Six months of business bank statements
  • Six months of tax returns
  • Three months of personal bank statements

Alt-doc misconceptions

We’ve heard some crazy misconceptions about alt-doc loans, so we wanted to debunk a few for you:

  1. “It needs no documentation”: Wrong. It isn’t called a “no-doc loan”. As discussed, an alt-doc loan needs alternate documentation of the kind listed above.
  2. “Self-employed professions should just go straight to an alt-doc loan”: Wrong. If you’re self employed and can provide adequate income proof in the form of 2 years of tax returns and good credit rating, then you may still qualify for a regular home loan through various lenders.
  3. “Always go with a major lender”: Australia’s lending market is very competitive, and a lot of non-major lenders offer alt-doc loans with features that major lenders don’t. Don’t write off non-major lenders without adequate research, as you’ll find there are dedicated lenders out there who might suit your needs best.
  4. “You don’t need professional help”: The Australian mortgage market is expansive and can be extremely complicated. Alt-doc-loans vary a lot across lenders in both assessment criteria and requirements. Scoping it without professional support may severely limit your options. Engaging a mortgage broker to do the heavy lifting for you will only benefit you in the long run.

Reach out to us today with any questions you have about alternate document loans!

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