The big banks usually ask for at least three payslips before they approve a construction loan. So, what do you do if you’re earning a strong income but can’t supply all the right documents? A low doc construction loan may be just the thing to help you build your first house. Find out what low doc loans are with Savvy, as well as how to maximise your chances of successfully applying for one.
Low doc construction loans are loans which are primarily designed to help self-employed Australians access financing to build their home by allowing them to provide alternative documentation. The term ‘low doc’ is short for low documentation, which means the borrower is not able to provide the level of documentation that major big banks may require to approve a normal construction loan. In most cases, this is your last year or two years’ worth of tax returns.
With over 16% of workers in Australia now self-employed (according to figures from the World Bank in February 2022), many online lenders and non-bank lenders now provide what are called ‘non-conforming’ home or construction loans. These low doc lenders provide competition to the big banks, but are regulated in the same way, so they’re just as safe as the traditional Big Four banks in Australia.
Low-doc loans are labelled ‘non-conforming’ because the borrowers aren’t able to conform to the strict lending criteria which are set by big banks; for example, the requirement to have been in the same job for more than six months. On top of this, this type of loan will generally come with a minimum deposit requirement of 30% of the cost of construction, if not more.
The information you’ll be asked to provide to prove your income may consist of a combination of any of the following documents:
In addition to documents about the construction you intend to build (such as building plans and council approval), you’ll also need to provide your lender with the following basic information to be approved for a low doc loan:
The exact level of documentation you’ll be required to provide will be less than what’s demanded by the big banks, but you’ll still need to prove who you are and what income and outgoings you have. You can use this useful budget planning calculator to combine and record all the information about your living expenses and income that you may be asked to provide by a lender.
Low doc construction home loans provide funds to borrowers in stages to enable them to build their home. These low doc mortgages can either have a variable interest rate or can be for a fixed term and have a fixed interest rate. They’re often fixed interest-only loans for one year, meaning repayments are kept to a minimum during the expensive house construction process. Unlike home loans, the lender’s money isn’t paid to the borrower but instead is released to the builder as each building stage is completed to the lender’s satisfaction. Once the home is built, the low doc construction finance is either paid off, refinanced or the loan naturally reverts to a principal and interest variable rate standard home loan.
To maximise your chances of getting construction loan approval, you need to work at presenting yourself as a low-risk borrower. So, what do low-risk borrowers look like according to lenders? Some of the tips to help you maximise your chances of getting loan approval are: