In the past, when boat buyers shopped around for the right yacht or boat loan options they’d often encounter marine lenders who only cared about their credit score. Other lenders would only care about their debt-to-income ratio, while some made loan decisions based more on liquidity. Still others focused more on overall net worth when making loan approvals or rejections. However, these days, all of the lenders you speak with are likely to care about all of these things combined. The good news is there are plenty of companies out there who specialize in boat loans and yacht financing – just check out our BoatsBank boat loan application page for an easy quick way to apply with them. But first, read this entire article so you know what you’re getting into. Ultimately, finally purchasing that dream boat that you’ve always imagined is indeed still quite possible, it just requires a bit of careful planning and understanding of the financing process.
Credit Score Requirements For Financing A Boat Purchase
Above: An excellent credit score of 811 would help boat buyers secure a boat loan from a qualified lender. Photo via Pond5.
According to Dave Patnaude, Vice President, Marine Client Manager at Bank of America, in this day and age you’re “looking at having a minimum credit score of 700.” This is the first step in the process, so if you don’t have at least a 700 credit score yet, it is probably best to work on building more history there (or working to repair your credit if it is damaged) before you begin shopping for your dream yacht for sale. You’ll need to make sure your credit score is up to par before searching through boats and yachts for sale online, so that you don’t get your heart set on something you can’t afford.
Another very important consideration for lenders is your debt-to-income ratio. This ratio is a relationship between your gross monthly income versus your monthly obligations/expenses. Generally, lenders want to see a debt-to-income ratio of 35 percent or less. You can figure out your own debt-to-income ratio quite easily by dividing your monthly debt payments by your monthly gross income.
Above: A high debt-to-income ratio will alert lenders that you may not be a safe bet as a borrower and raise red flags when processing your boat loan request. Photo via Pond5.
Expressed as a percentage, boat financing lenders will use this number to determine how well you are managing your monthly budget and finances, and if you can truly afford to repay the amount of money you are asking to borrow. Lenders will look closely at this ratio, and consider both your front-end ratio (i.e. your housing expenses and property taxes) as well as your back-end ratio (i.e. all of your monthly payments including credit cards, car loans, child support, student loans and other revolving debt). Your front-end ratio should not exceed 28 percent.
Liquidity, Net Worth And Assets
When it comes to liquidity, lenders want to see some form of liquid asset (such as cash, stocks, bonds, a 401k, or an IRA) which can be turned into cash within 30 days or less. Lenders need the security of knowing that if you lose your job after getting that boat loan, you’ll have reserves to carry you for six, 12, or even 18 months. If your reserves can only carry you for a few months, getting approved could be tough. Very tough.
Above: A red Ferrari 250 GT Berlinetta – not quite the 250 GTO that sold for $70 million, but a valuable car nonetheless that would be considered a luxury asset. Photo via Pond5.
The next financial consideration that lenders may take into account is your net worth and any assets you have. If for example you have a 1963 Ferrari 250 GTO (valued at over $70 million USD) sitting in your garage, well, that might change the game a bit. Granted, if you don’t happen to own the world’s most expensive car, even a more modest car that you have paid off could be taken into consideration based on its resale value. As long as you’re not trying to buy one of the most expensive yachts in the world of course!
Credit Inquiries And Loan Applications
If you meet the credit score minimum, debt-to-income ratio and liquidity requirements, remember that repeated inquiries can also pull down your score during the process —so keep the number of credit reports minimized. Patnaude added that the number of lenders you have to choose from has decreased as a result of the defaults we saw through the recession years. Although there are still a healthy amount of lenders who will consider your situation and work with you if you are close to meeting the requirements.
Remember that there are two different types of credit inquiries: hard credit inquiries and soft credit inquiries. When you are applying for loans or credit cards, the lender or financial institution will run what is called a hard inquiry (often called a “hard pull” or just “hard credit check”). Hard inquiries generally lower your scores by a few points, although in some cases they may not have an effect. These types of credit inquiries typically stay on your credit report for two years.
A general rule of thumb is to minimize hard inquiries as much as possible. Having a lot of hard inquiries within a short time frame will be a red flag for most lenders, and will likely impact your credit score negatively. A few hard inquiries over the course of 2-3 years is considered fairly normal however. Again, just try to keep this number as low as possible.
A soft inquiry (or “soft pull”) is usually part of a general background check or an unauthorized check on your credit. Employers may often run a background check that will show up on your report but not have any impact on your score. Checking your own scores may also show up as soft inquiries but this will not have any effect on your credit score either.
Loan History, Mortgages And Equity
Another thing many lenders will look at now is whether or not you’ve had loans in similar amounts as the one you are applying for in the past. It is possible you meet a lot of the requirements from a debt-to-income ratio standpoint with a good credit score and you have the down payment ready, but you’ve never taken out a loan anywhere near the amount you are applying for. This can be a red flag for some lenders, who prefer more of an established payment history on a big purchase such as a larger yacht or a home.
Above: Existing and past mortgages, home equity and overall loan history and repayment history can be a big plus when applying for a loan for a boat purchase or to buy a large yacht. Photo via Pond5.
In fact, some boat financing lenders will not consider a loan to a borrower who doesn’t already have a mortgage in good standing with great payment history. Of course, if you’ve paid off your mortgage, you are likely sitting pretty and you are likely a very attractive borrower for many yacht financing companies and marine industry specific lenders. Also, if you’re applying for a loan for a smaller or mid-sized boat that you can surely easily afford to repay, this will be less of a concern for many lenders.
Boat Values Versus Boat Loans
Once you have your financial facts in order and you know the value of the boat you’re looking at (lenders won’t usually go much beyond the boat’s “book value,” which you can find in the NADA guides), talk to a lender or two and get pre-approved—or as Patnaude humorously calls it, “armed and dangerous.”
Boat Trader’s Boat Price Checker tool is a handy feature that can help you get a good valuation for the yacht you are interested in buying. The tool shows you the average, lowest and highest prices found in the Boat Trader search results for boats that match your search criteria.
It is important to have an accurate and fair assessment of the value of the vessel you are considering and not to overpay for the boat. Keep this in mind when negotiating boat prices with the seller or broker, as it will impact your loan as well.
Trade-Ins And Yacht Financing
What if you have to sell your boat, in order to get the cash for the down-payment on a new one? Go through the pre-approval process first, just to be sure you’ll qualify. “Before you sell, go ahead and get pre-qualified on the next boat,” Patnaude said. “Just explain to the loan officer, that you want to apply based on not having the current boat loan, but having a new boat loan on this boat for this purchase price with the intent of putting this amount down. I highly recommend it, because I’ve already come across two people in the last six months who sold their existing boats, went to apply to get new boat loans, and found out that they couldn’t qualify. Then they had no boat.”
Oh, the horror…
For more information on this topic, check out our article on Boat Financing During The COVID-19 Pandemic.
Editor’s note: this article was originally published in 2014 and last updated and rewritten with current financial information and market considerations in May 2021.
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