Can You Get a Low-Doc Construction Loan in a Regional Area?

How postcode, LVR, income evidence, land size and the building contract affect Low-doc approval

Low-doc construction loans are available from a limited number of Australian lenders. Learn how postcode, LVR, income evidence, land size and the building contract affect approval.

Getting a construction loan can be more difficult when the borrower is self-employed, needs alternative income verification and wants to build in a regional town.

Each part of the application introduces another policy test:

• Is the lender offering construction loans?
• Does it accept low-doc or alt-doc income verification?
• Is the property’s postcode acceptable for construction lending?
• Does the proposed loan-to-value ratio fit that location?
• Is the land and proposed dwelling acceptable security?
• Does the building contract meet the lender’s requirements?

A lender may be comfortable with alt-doc borrowers but not offer construction loans. Another may fund construction but restrict it to metropolitan and major regional locations.

This is why a regional low-doc construction application usually has fewer options than either a standard construction loan or a standard alt-doc home loan.

Related research: Can You Buy Land First and Add a Building Contract Later Under the 5% Deposit Scheme?

Are low-doc construction loans still available?

Yes, although they are offered by a relatively small part of the Australian lending market.

The lender policy reference reviewed for this article contains three lenders with an explicit construction pathway using alternative income verification:

• La Trobe Financial;
• ORDE Financial; and
• Pepper Money.

This does not mean all three will accept every regional postcode, property type or loan amount. Each applies separate rules for location, land size, construction type, borrower profile and maximum LVR.

Several lenders in the policy reference offer alt-doc home loans but expressly do not offer construction loans. Others provide construction loans only where the applicant supplies full financial statements and tax returns.

What is a low-doc construction loan?

A low-doc construction loan is designed primarily for self-employed borrowers who cannot demonstrate their current income using the standard two years of finalised tax returns and financial statements.

The term “low doc” can be misleading. The borrower still needs to provide substantial evidence.

Alternative income documents may include:

• recent business activity statements;
• business bank statements;
• an accountant’s letter;
• trading statements;
• an income declaration;
• an Australian Taxation Office portal extract;
• evidence of the business’s ABN and GST registration; and
• personal bank statements showing regular director salary payments.

The lender also requires the complete range of construction documents. Alternative income verification does not reduce the evidence required for the property and build.

Which lender policies provide for alt-doc construction?

The following lender examples come from the supplied policy reference and illustrate how differently these applications can be treated. They are not recommendations, and the policy must be confirmed before an application is lodged.

La Trobe Financial

La Trobe’s residential construction policy provides for both PAYG and self-employed borrowers. On completion, the construction facility can revert to a standard full-doc or Lite Doc loan without requiring a new long-term loan application.

The policy includes:

• single residential dwellings and duplexes;
• licensed builders;
• metropolitan locations;
• consideration of major regional locations;
• a maximum 80% LVR for qualifying loans up to the applicable loan-size limit;
• interest-only payments during construction; and
• conversion to principal-and-interest repayments after completion.

“Major regional locations considered” does not mean every regional postcode is accepted. The specific town, expected resale demand, local population, land size and property type still need to be checked.

ORDE Financial

ORDE’s residential construction policy expressly allows full-doc and alt-doc income verification.

Its construction parameters include:

• owner-occupied or investment construction;
• house-and-land packages;
• new builds;
• substantial renovations;
• construction of up to two dwellings on one title;
• loans up to $2.5 million;
• residential vacant land of up to five acres;
• a licensed or registered builder; and
• completion generally required within 12 months.

The policy requires a fixed-price building contract, plans, specifications, a proposed progress payment schedule, relevant council or planning approvals and quotes for works outside the main contract.

Location categories still apply. The presence of an alt-doc construction product does not override the lender’s postcode rules.

Pepper Money

Pepper’s construction policy contains an alt-doc pathway for self-employed borrowers.

The supplied policy reference provides for:

• construction of up to two residential properties;
• owner-occupied and investment purposes;
• a maximum alt-doc construction LVR of up to 85%, subject to the complete policy;
• a maximum loan amount of $2 million;
• up to 18 months of interest-only payments during construction;
• ABN registration for at least 24 months;
• GST registration for at least 12 months; and
• alternative verification using business statements, BAS or an acceptable accountant’s letter.

For construction lending, Pepper restricts acceptable residential securities to its Category 1 and Category 2 locations, with a maximum land size of five acres.

Its general acceptance of properties in other postcode categories does not necessarily extend to construction applications.

Can you get an 80% low-doc construction loan in a town such as Robe?

Potentially, but an 80% product maximum does not guarantee an 80% approval in every postcode.

For a property in Robe, South Australia, or another regional town, the lender would first need to identify how the postcode is classified under its current location guide.

Possible outcomes include:

• the postcode is acceptable at 80% LVR;
• the postcode is acceptable only at a lower LVR;
• the town is considered only by exception;
• the location is acceptable for an established property but not construction;
• the postcode is acceptable, but the proposed land size or dwelling is not; or
• the postcode is outside the lender’s construction area.

A broker should obtain a written postcode confirmation from the lender or its business development manager before relying on a servicing result.

Does “no postcode restrictions” really mean any postcode?

Usually not.

A lender may advertise broad geographic coverage while retaining restrictions for:

• construction loans;
• vacant land;
• alt-doc applications;
• high-LVR loans;
• rural or agricultural property;
• remote communities;
• properties with limited comparable sales;
• properties outside a defined radius of a major centre; and
• security that would take longer to sell.

The postcode may also affect the maximum loan amount rather than causing an outright decline.

A lender that accepts an established house in a particular location may still decline a new build there. Construction lending requires the lender to assess both the land as it exists now and the expected completed property.

What is the difference between regional and rural property?

The terms are often used interchangeably by borrowers, but lenders may treat them differently.

Regional residential

This generally refers to an ordinary residential property in a recognised regional town or city.

The property is typically:

• zoned residential;
• connected to normal services;
• accessible by a sealed road;
• similar to surrounding homes; and
• supported by enough comparable sales.

Rural-residential

A rural-residential property may be located on acreage, use tank water or septic systems, contain sheds or outbuildings, or be further from a major town.

A lender may accept it but reduce the maximum LVR or land-size limit.

Rural or agricultural property

A property used substantially for farming, primary production or commercial agricultural activity may fall outside residential construction policy entirely.

The valuer’s description is important. A borrower calling a property “residential acreage” does not prevent the lender or valuer from classifying it as rural or income-producing.

Why are regional low-doc construction applications harder?

The lender is assessing several overlapping risks.

Income risk

Alternative documents may give the lender less historical information than complete tax returns and financial statements.

The lender will want to understand whether the income shown in recent BAS or bank statements is sustainable.

Construction risk

The project may experience delays, cost increases, builder failure, contract variations or valuation shortfalls.

Location risk

A lender may believe that a property in a smaller town would take longer to sell if the loan entered default.

Valuation risk

There may be fewer recent comparable land and house sales. The completed valuation may come in below the combined cost of the land and build.

Liquidity risk

The borrower needs enough money to cover costs that the lender will not fund, including overruns and some contract variations.

A strong application therefore needs more than acceptable servicing.

How is the LVR calculated for a construction loan?

The lender commonly considers both:

• the total cost of the land and construction; and
• the valuer’s assessment of the property’s value when complete.

The lender may base its maximum advance on the lower acceptable figure under its policy.

For example:

• land value: $250,000;
• fixed-price building contract: $500,000;
• total project cost: $750,000;
• completed valuation: $700,000; and
• proposed loan: $600,000.

Although the loan represents 80% of the project cost, it represents approximately 85.7% of the completed valuation.

A lender capped at 80% LVR would require the loan to be reduced or the borrower’s contribution to increase.

What if the borrower already owns the land?

Equity in the land can form part of the borrower’s contribution.

Suppose the land is worth $300,000 and has a loan of $150,000. The borrower may have approximately $150,000 of gross equity before allowing for valuation differences and lender requirements.

The lender will still assess:

• the existing land debt;
• the completed valuation;
• the construction contract;
• available cash;
• any costs outside the contract;
• interest during construction;
• existing mortgages; and
• the maximum LVR for the postcode.

Owning the land outright does not solve an unacceptable postcode or security classification.

What documents are normally required?

A regional alt-doc construction application may require:

Income evidence

• accountant’s letter in the lender’s required format;
• six or 12 months of BAS;
• business bank statements;
• trading statements;
• income declaration;
• ABN and GST history;
• ATO portal information; and
• evidence of existing business debts.

Construction evidence

• signed fixed-price building contract;
• final building plans;
• specifications and inclusions;
• progress payment schedule;
• planning or development approval;
• council-approved plans;
• builder’s licence details;
• builder’s insurance;
• quotes for work outside the contract;
• evidence of the borrower’s contribution; and
• contingency funds.

Property evidence

• land contract or title;
• rates notice;
• zoning information;
• details of services and access;
• valuation;
• evidence of land size; and
• information about any commercial or agricultural use.

Can an owner-builder use a low-doc construction loan?

Owner-builder applications are considerably more difficult.

The three explicit alt-doc construction policies reviewed focus on construction by a licensed or registered builder. A lender may decline an owner-builder project even where the borrower is an experienced tradesperson.

Owner-builder loans can involve additional risks around:

• cost control;
• insurance;
• project management;
• progress inspections;
• compliance certification;
• completion timing; and
• the lender’s ability to finish the project after a default.

A borrower should not assume that being licensed in one trade makes them an acceptable owner-builder under home loan policy.

Related research: Can You Get a Construction Loan If the Builder Hasn’t Started Yet?

Can the loan cover cost overruns?

The lender advances money against completed stages of construction. It does not generally provide an open-ended facility for overruns.

Borrowers may need their own funds for:

• upgrades and variations;
• landscaping;
• driveways;
• retaining walls;
• demolition;
• utility connections;
• council costs;
• furnishings;
• work excluded from the fixed-price contract; and
• valuation shortfalls.

If the borrower uses their available cash for the deposit and initial costs, there may be no buffer left when the builder requests a variation.

What happens during progress payments?

The builder usually issues invoices at agreed stages, such as:

1. deposit;
2. slab or base;
3. frame;
4. lock-up;
5. fixing; and
6. completion.

The lender may arrange inspections before releasing each payment. Funds are normally paid progressively rather than giving the entire approved loan to the borrower upfront.

Interest is usually charged only on the amount drawn, although fees and other loan conditions vary.

Steps to assess a regional alt-doc construction application

Before committing to land or a builder, the borrower should establish:

1. the exact postcode classification;
2. whether construction is permitted in that location;
3. whether alt-doc verification is available for that construction product;
4. the maximum LVR and loan size;
5. the acceptable land size;
6. whether a single dwelling, duplex or multiple dwellings are proposed;
7. the documents needed to verify business income;
8. the likely completed valuation;
9. how much cash is required before the first progress payment; and
10. how overruns and work outside the contract will be funded.

The main point

Low-doc construction finance is still available, including through at least three lender policies in the supplied reference.

The harder part is finding a policy that accepts the complete combination of:

• alternative income verification;
• construction lending;
• the specific regional postcode;
• the proposed LVR;
• the land size;
• the building type; and
• the borrower’s financial position.

There is no reliable “any postcode” rule. The location should be checked before the borrower signs an unconditional land or building contract.