All about Alternate Documentation Loans

18th Sep, 2020 | Self employed

In this article:
Here's a quick guide on Alternate documentation loans - what they are, how they work and some common misconceptions associated with them.

Every borrower’s circumstances are different. Someone with an impeccable credit record may be looking for the most competitive rate the market has to offer. On the other hand, a self-employed professional or small business owner despite having the required financial stability may not be able to produce sufficient Documentation to fulfil lender requirements for a regular home loan. This is where Alternate Documentation loans (alt-doc-loans) come into the picture. Here’s a quick look at what they are and how they work.

What are Alternate Documentation Loans?

As the name suggests, an alternate-documentation loan is a loan that is designed for individuals who are unable to offer traditional income proof (like payslips) and instead provide alternative Documentation in the form of tax returns, business and bank statements. While self-employed professionals and small business owners are the most common users of alt-doc loans, they could also be of help to individuals who are unable to provide the required Documentation for a regular home loan. Alt-doc-loan requirements vary from lender to lender.

How is it different from a regular Home Loan?

They are different from a traditional home loan on two fronts.

  1. The first is eligibility. Regular Home loans have more stringent documentation requirements and typically look at either three months of payslips or two years of tax returns. While alt-doc-loans usually consider three months of personal bank statements and six months of Business activity and business bank statements – this again varies across lenders.
  2. The second is the interest rate. Lenders view an alt-doc-loans as a riskier offering when compared with a regular home loan and therefore charge the borrower a slightly higher interest rate.

Tailored options for different self-employed circumstances.

When should it be considered? 

Not every self-employed professional or small business owner should, by default go with an alt-doc-loan. If a self-employed individual can provide two years of tax returns with a good credit rating, then he/she can easily qualify for a regular home loan. Here are the circumstances where it should be considered.

  1. If you’ve experienced a recent surge in business activity and consequent income and are looking at a larger loan size, then you should consider an alt-doc loan. This is so as a regular home loan will take into account an average of your income over the past two years and may not provide you with a loan amount commensurate with your latest income
  2. If you don’t have the needed Documentation like updated two-year tax returns or six months of personal and business bank statements, an alt-doc loan could be the answer.
  3. If you’ve had a blemished credit record but have managed to bring expenses under control and are looking for a loan, then once again several lenders may be willing to offer you an alt-doc loan based on your more recent expense habits.

What kind of Documentation would you need?

While Documentation varies across lenders here are some standard requirements:

  • Australian Business Number (ABN) registration for your business
  • An accountant declaration of your income
  • Six months of Business Activity Statements (BAS)
  • Six months of business bank statements
  • Six months of tax returns
  • Three months of personal bank statements

Common Alternate Documentation Loan Myths

Here are some common misconceptions borrowers have

  1. It needs no documentation: As discussed, an alt-doc loan needs alternate Documentation in the form of BAS, Bank statement etc. – not no documentation at all.
  2. All self-employed professionals should, by default, go for an alt-doc loan. If a self-employed person can provide adequate income proof in the form of 2 years of tax returns and good credit rating, then he/she can qualify for a regular home loan.
  3. Always go with a major lender. A lot of non-major lenders offer alt-doc loans with features that major lenders don’t. Don’t write off non-major lenders without adequate research.
  4. You don’t need professional help. The Australian mortgage market is vast. Alt-doc-loans vary a lot across lenders. Scoping it without professional support may severely limit your options. Engage a mortgage broker to do the grunt work and find the right product fit.

Reach out to us for the best way forward for you as per your circumstances.