Can you get a low doc loan with a bad credit score?
Low documentation (low doc) loans are financial products for self-employed people that lack the traditional documentation needed to obtain a home loan. Fortunately, you can get a low doc loan with a bad credit score, but there are some crucial steps you will need to take.
First, if you don't know your credit score, you should find out what it is. Learn how to do this by looking at our previous post on how to obtain your credit report. If you find you have a bad credit score, you may still be eligible for a low doc loan if you can adequately explain your credit history to your loan provider.
You'll also need to provide proof of your income. Think about your application from the lender's perspective - to accept a loan with less information means more risk. As such, you'll want to show evidence of your creditworthiness, primarily that your business provides sufficient income to service your debt obligations on time.
How can I prove my income for a low doc loan?
You will need to show your credit provider one of the following documents as proof of income:
1. A letter from your accountant, confirming your income
2. A bank statement showing evidence of your business income and expenses
3. A business activity statement (BAS)
How will my low doc loan application be assessed?
Proof of income is only one part of the application process. Lenders may also assess your application using the following metrics:
1. Your deposit size
Generally speaking, a larger deposit is better as it leads to a lower loan-to-value ratio (LVR). For example, a $175,000 deposit on a $700,000 property would mean a loan of $525,000 and an LVR of 75 per cent. Not only does it mean lower interest payments due to the principal of the loan being smaller, it can also lead to a lower interest rate as the lender considers the loan lower risk.
2. Your ABN
Your Australian Business Number (ABN) is a key indicator of how long you've been self-employed. An older ABN tells a creditor that your business has proven viable through time, whereas a recently acquired ABN doesn't inform your creditor at all about your business's performance.
3. The property's location
The more confidence the lender has that they can recoup their costs should they need to liquidate your property, the more likely they are to approve you for a loan. Applications for properties that are considered high-risk security - like those in small towns or on vacant land - will be less likely to succeed.
You can check out our Low Doc Loan product page for a more in-depth explanation of Red Rock's low doc offerings and assessment criteria.
Here at Red Rock Mortgages, we specialise in helping people who can't walk the conventional credit pathways get a loan. If you're interested in applying for a low doc loan, get in contact with the team at Red Rock Mortgages today.