Understanding Low Doc/Alt Doc Loans
There is a growing number of people who are now self-employed. Alt Doc loans are an option for self-employed clients, who may not tick the usual loan application process boxes for income verification, (i.e., recently completed tax returns and other financial statements).
After the GFC, the National Consumer Credit Protection legislation was introduced and identified that low doc loans did not meet these lending requirements and was therefore no longer offered in that form. They have been replaced with Alt Doc loans across the lenders. Alt Doc is short for Alternative Documentation.
Alt doc loans are similar in purpose, still require supporting documentation and still go through the Lender’s credit assessment criteria, however the documentation required to confirm income differs across the Alt Doc Lenders, but caters to a wider variety of financial circumstances, when full tax returns and financial statements are not available.
Documentation Requirements
Alt Doc loans allow borrowers to prove their income in other ways however still require a full credit assessment, serviceability check and suitability assessment.
Alt Doc loans usually require a declaration of financial position/income in combination with one or more of the following reduced documentation requirements (but not limited to).
- Accountants Letter
- Business Activities Statements (BAS)
- Recent Business Bank statements
- Evidence of ABN registration
- Evidence of GST registration
Refer to the Oxcel Responsible Lending Policy on Low Doc loans for more information.
Depending on the Alt Doc lender, the Alt Doc loan would usually have a higher interest rate and can range from prime, near prime or specialty product types.
Alt Doc Benefits
- Flexibility if you are self employed
- Simplified income documentation
- Customised products to suit
Alt Doc Risks
- Higher interest rates (priced for risk)
- A bigger deposit is usually required (lower LVRs)
Verifications and Notes
Consumer loans are covered under responsible lending and BID, so the broker needs to be comfortable with the declaration of income and it needs to make sense. The broker should have clear notes to outline why they are going down the Alt Doc path.
Good, detailed notes are essential. File Notes should be made as to why Alt Doc has been recommended. Examples are (not limited to):
• Tax Returns are not up to date
• Income has increased since last tax return
• Complex Lending Structure
• Distribution of income to family members
All other verifications are still required ie regular income going into account, living expenses, savings etc.
Insights and Red Flags
Alt doc is a solution for a client, however, it’s important that the Broker adhere to their Responsible Lending obligations and act in the client’s best interest.
Watch out for red flags (not limited to):
- If you see financials for a lower income and then receive a self-declaration and accountants’ letter for higher declared income, you cannot undo what you have seen, if it doesn’t make sense, you need to pass on the application.
- Ask yourself if the declared income is reasonable for the client’s occupation type.
- If the Accountant doesn’t return your calls.
- While performing an overall basic verification, using the declared income, less any liability payments and expenses, you would expect to see evidence of savings every month, if there are no savings then questions need to be asked about the income amount that has been declared. If it doesn’t make sense, you need to pass on the application.
Reminder: if anything doesn’t sit right, you can’t verify or you don’t feel comfortable with the information being disclosed and provided, you should make notes and advise the client that you cannot assist them. Remember you cannot unsee something.
Disclaimer: This information is current as at the time of each QRG publication. It is a general information guide only