Low doc construction loans
If you are self-employed and want to finance a construction, one option for you may be a low documentation construction loan also known as a low doc construction loan.
Low doc construction loans are for people who are borrowing to build a residential dwelling(s), have an income and assets, but are unable to provide all of the required proof of income documents usually required by banks and lenders such as you financial statements and tax returns.
In the past low doc construction loans were not available. However, now some lenders have made them available for self-employed people.
A low doc construction loan can be a good option for self-employed people wanting to build their dream home or a small development but who don't have all their financials up to date.
A low doc construction loans described here is unsuitable for larger scale developments.
You will need to be self employed person to get a low doc construction loan and have an Australian Business Number (ABN), usually for a minimum of six months, preferably longer.
For a low doc construction loan you will not need to provide your financials such as tax returns, financial statements or notices of assessment. However you will still need to provide evidence of your income, you can do this via:
- Your BAS Business activity statements
- An Accountants letter
- Trading accounts showing income
- Income declaration
Low doc owner builder loans are not available. Self-employed people wanting a construction loan should use a licensed builder or if they are able to prove their income using full documentation including financial statements and tax returns they may be able to get an owner builder loan.
Lenders will require that you have a fixed price building contract with a licenced builder. This is because with a fixed price building contract the lender knows exactly how much the construction will cost, unlike a cost plus building contract where costs can vary depending on the cost of the materials used in the construction.
You can use a low doc construction loan to construct any of the following:
- Single house on a block
- Weekenders / holiday homes
- Knock down and rebuild (if you have enough equity in the land)
- Granny flats
- A duplex
- Up to four units on one title
- Small developments
Not all low doc construction lenders will accept all property types. Contact an Oak Laurel construction loan specialist to find out your options.
Low doc loans can be used to construct an investment property or owner occupied homes. A residential construction loan (including low doc) can be a good option for small developments (up to four dwellings on a single title) as the interest rates and fees are generally lower and maximum loan to value ratios higher than for property development funding.
The maximum loan to value ratio (LVR) available on a low doc construction loan is 85%. However, their conditions are very strict. Most lenders will allow up to a maximum loan to value ratio of 80%. Some lenders only considering low doc construction loans under a loan to value ratio of 60%. Furthermore, many lenders will require lenders mortgage insurance (LMI) for higher loan to value ratio loans (e.g. some lenders require LMI for LVRs above 60%).
In most cases you will not pay a higher interest rates because it is low doc. However, if you do not fit with normal low doc lending criteria you may need to use a specialist lender, in which case these specialist lender typically have higher interest rates.
In the past if you had bad credit getting a low doc construction loan was very difficult and expensive. However, Oak Laurel now has lenders that will accept bad credit low doc construction loans. However, expect to pay a higher interest rate when you get a low doc construction loan with a bad credit history. Unlimited defaults, judgments and writs (paid or unpaid) and Discharged bankruptcy (1 day) are acceptable. See here for more information about bad credit construction loans.
Most lenders will require the following documents about your construction project:
- A copy of your fixed price building contract or construction tender
- A copy of the council approved building plans (or draft plans)
- Specifications / schedule of finishes
- Construction certificate or building permit
- Builder’s insurance
- Builder’s risk insurance / public risk insurance