When you want to buy a house, the mortgage lenders generally require you to provide huge amounts of documentation about your income before they will even consider lending to you. This is where a low doc loan can be a great idea, providing you with the necessary money with which to buy your house without you having to amass huge amounts of paper. However, a low doc loan is not necessarily the easy answer. You pay for the privilege of not having to provide all that paperwork and the price of this may be rather higher than you can actually afford.
A low doc loan lets you get a loan with very little to back up what you say about your income, but the lender protects itself in other ways. For a start, the amount that you can borrow will usually be lower than a standard lender will lend you, usually only around 80% of the value of the property you are hoping to buy, which means you will have to put up at least 20% of the property’s value. If you can afford that amount as a deposit, that’s great. Otherwise, you need to start finding paperwork and go to the standard mortgage lenders.
Another high cost associated with a low doc loan is the fees and charges that you will have to pay as part of the process of setting up the loan in the first place. These are quite an expense anyway, but with a low doc loan they are generally quite a bit higher than the standard lenders would charge, as this is another way that the lender protects itself from the possibility of you defaulting on the loan.
Not only are the fees and charges usually higher with a low doc loan, but the interest rate that your payments will be based on will also be higher than the standard, and this is something that you really have to be careful about. Be realistic – can you afford those monthly payments Because if you can’t, you are better off not going for a low doc loan. I mean, let’s be honest, there isn’t much point in spending all that money to get the loan if you will then not be able to make the payments on it.
The other thing is mortgage insurance, usually compulsory mortgage insurance. You will have to pay for mortgage insurance as part of the process, but this insurance is to protect the lender, not you. If you can’t keep up the payments on your low doc loan then you could still lose every penny you invested and more, even if you have the insurance.
In addition to this, a low doc loan will often only have a short time period, maybe only a year. After this time period the loan will be restructured and you will often have to pay more fees at that time. The fact is, a low doc loan sounds like a great idea, but it is a very expensive great idea. You have to make very sure that you can afford everything before you commit, as once you are in there is no turning back.