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RISKS WITH NO DOC / LOW DOC LOANS |
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No Doc Loans - Are They For You?
If you take out a 'low-doc' (low documentation) loan you won't need to give the lender as many documents to prove your income, assets and liabilities. You still have to apply in writing and sign your loan agreement, but you may not be required to produce pay-slips, tax returns or other proof of income that a more traditional lender would normally require. You will normally be asked to simply state your income - a process called self-verification.
Low-doc loans can help if you would not normally qualify for a standard loan, but there are usually added costs or conditions associated with the loan. It's important that you understand these differences.
Special Conditions
In a low-doc, no-doc loan special conditions may apply. You may have to:
- pay a higher interest rate if you are not able to provide documents about your financial position
- pay additional fees and charges, including ‘risk fees’
- pay for mortgage indemnity insurance
- contribute more of your own money towards the purchase price
- offer additional security for the loan, for example, your car, and
- accept a loan for a shorter period, such as 12 months (which may have to be refinanced at the end of this period with additional costs involved at that time).
Risks
Low doc loans are not for everyone and as with any financial commitment you must do your homework and explore all of the potential risks associated with the product. Many people with a troubled credit history, casual workers or self-employed people who may be in a weaker position when it comes to dealing with the financial risks involved, have taken on a low doc loan. It is important to realise that the lender will do everything in its power to protect its interests.
With many low doc loans it's up to you to decide whether you can afford the repayments. If you don't give the lender an accurate picture of your finances, the lender will base their decision on whether to offer you finance on whether they can recover the loan from selling your home or other security. Just because they'll give you a loan, doesn't automatically mean the lender thinks you can afford the repayments - you need to decide for yourself.
Low doc and No doc loan products may suit you, but you need to weigh up the extra costs involved. In some cases you may be able to get a lower interest rate if you can give more documentation about your financial history to the lender. Lower costs will usually make you better off in the long run.
Remember too that Lenders Mortgage Insurance (LMI) is often required with such loans, and this can add to the up front cost of the loan. It also is there for and protects the lender, not the borrower. If forced to sell, you may lose everything you invested in the property and still owe money if the sale does not cover what you borrowed.
At RFS we take time to explain these risks to our clients and we won't just flog you a product for the sake of earning a commission. If we don't believe that the loan is a practical and ethical solution to your financial wants, then we will tell you.
For more information or to make an appointment to meet with an RFS consultant,
Call Now at 1300 88 42 99 |
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