The difference between a low doc loan and a full doc loan is the type of documents needed by a lender. The documentation you provide will be reviewed by the lender who ultimately has the final say over loan eligibility. Full documentation loans often require extensive paperwork, typically traditional documents, whereas low docs are somewhat less formal. Essentially, alternative documents can be used to meet the criteria of the lender.
So, what other differences are there between a full doc and a low doc loan?
Low Doc Home Loans Require Sizeable Deposits
If you’re looking to purchase a home, you will need a deposit to secure it. Unfortunately, there are major differences between full doc and low doc loans. Typically, full doc (standard loans) requires a limited deposit – anything between 5 and 10% – depending on the property and cost. A low doc loan, however, will require substantially more. Most lenders want 20% or in some cases, 40%. It’s a sizeable deposit that most lenders want to see as it lowers their risk.
Restrictions Over Geolocation
Lenders often look at ways to reduce the risk on low doc home loans. Since they accept alternative documentation, it puts them at great personal risk should you default on the loan. One major difference between a low doc loan and a full doc loan is the location of a property.
Some lenders may restrict where you can purchase a home. For instance, remote areas and small towns might be a no-go zone for lenders. Some would argue if you default, it might be too difficult to recoup their money. With full doc loans that’s not so much of a problem. However, it’s important to note that low doc home loans aren’t always restrictive. Some lenders won’t limit your purchasing scope but it can vary.
Interest Rates Tend to Be Higher with Low Documentation Loans
Every loan comes with interest (unless it’s a personal loan from a family member), and the amount you’ll pay can differ significantly with a low doc loan. For instance, lenders may set the interest rate higher because they’re assuming a bigger risk when accepting your loan application. Of course, interest rates differ from each lender, but typically, low doc loans command bigger interest rates.
Are Low Documentation Loans Worth It?
People are torn between full doc and low doc home loans and it’s easy to see why so many are unsure. On the surface, a low doc loan looks terrible (especially with higher interest rates and geolocation restrictions); however, it does have good points too. Remember, if you’re not eligible for a traditional loan, this can be a good alternative. Of course, it all depends on the amount you wish to borrow and the lender. Some will offer reasonable rates (more so than others).
Choose the Right Loan for Your Future
Borrowing money is daunting, whether you’re borrowing a lot or very little. There is always pressure on your shoulders; fortunately, there are options to consider. A full doc loan requires extensive (and traditional) paperwork, whereas a low doc offers alternatives. It means you still have to prove income but with other types of documents which can be incredibly useful.
If you don’t have certain documents or aren’t in regular employment, full doc loans are going to be out of your remit. Low doc loans, however, do provide a useful alternative.