Boat Loan Basics - Debt to Income Ratio
August 10, 2012
This is a very definite qualifying factor for boat loans, yacht financing and refinancing, and rv loans. If your debt to income ratio is too high, you will not be able to get a boat loan. Most lenders want to see below 40%. Some will go up to 50% and adjust the interest rate. Above 50%, you need to discuss with your personal banker.
The old days of stated income for boat loans are gone, for now anyway. Most lenders will look at least at a W-2 or current paystub. A lot want complete packages including your individual tax returns and a personal financial statement to prove your income. The biggest issue in this area of boat loans is the simple fact that if you do not report your income or reduce it to very little, and you have debt, your debt to income ratio will be high. A lot of self-employed people or sole proprietors reduce their incomes to very little to save on income taxes. The boat loan lenders are absolutely looking at net income. Let's get into a little more detail.
The debt to income ratio is calculated by dividing your monthly debt listed on your credit report by your monthly income. The boat loan lenders usually do not take into account items such as your electric or gas bills, or other bills that are not listed on your credit report. Your monthly income is your gross income if you are a W-2 employee or your net income if you are self-employed reporting on Schedule C. Your monthly income also includes interest and dividends from savings and stock accounts, retirement income reported on 1099s, depending on the banks either distributions or sch e income from businesses, and net income from rental properties. Unless you are a stock trader, they often don't include capital gains and losses. Let's look at a few examples and some more details.
If you are a W-2 employee making $120,000 a year, your monthly income is $10,000 a month. Let's say you have a $5,000 a month mortgage payment, a $800 car payment, a $1,200 RV loan payment, and several credit cards with $10,000 in total balances. Each bank has its own take on what to do with credit card balances. Some take minimum monthly payment and some up to 5%. Let's use 5% for our example and say the month payment is $500. The total monthly debt here is $7,500. Although you can make your monthly bills easily, your debt to income ratio is 75%!!! This will not qualify. Even your mortgage alone takes you to 50%. We see this a lot with higher incomes having higher mortgage payments. We haven't even figured a boat loan payment into this equation yet.
Let's look at another fairly simple debt to income ratio. Let's say you make $60,000 a year, have an $800 mortgage payment, a $400 car payment, $2,000 in credit cards ($100 monthly) and looking at a boat with a payment of $300. You have monthly debt of $1,600 and monthly income of $5,000 and a debt to income ratio of 32% ($1,600 / $5,000). You will qualify for this part of the boat loan. I should have written this one first and put it up top for a very simple sample of how to compute it.
Ok, let's get into a few harder situations. Let's say you are an auto mechanic and you report everything on Schedule C, i.e., you are self-employed. You hate to pay income taxes and have a great accountant and your gross $150,000 but your net income is only $20,000. Some people would say I make $150,000 in this situation. That may be true for discussion, however, for loans, they are going to look at your net income or $20,000 and this equates to $1,666 a month. To be at 40% and below, your total debt including boat payment needs to be below $650. That's below most people's monthly rent or mortgage payment.
That brings up what payment do you use for your living accommodations. You would use rent if you pay rent and your mortgage payment including escrow if you have a mortgage. If you live with your parents or have paid off your residence, most lenders will choose a number based upon their averages and most of those are between $500 to $800 whether you are paying it or not. If you jointly own a home, they are going to count the full payment against you in this computation. We have some situations where one spouse has good credit and the other doesn't and they say one wants to do it in their name alone. That's ok for some banks, however, you must be able to cover the whole mortgage payment alone in your debt to income ratio.
If you own property jointly and most of your assets are held jointly, most banks will want to see you both on the loan. One spouse with great income and bad credit and one spouse with very little income and great credit is not going to work for purposes of the debt to income ratio where they are trying to apply with the good credit only.
Let's discuss briefly rental property. Most banks will take net rental income from schedule e of your 1040 and add back the depreciation (a non cash item) and the interest, taxes and insurance as they have already been reported and used as the mortgage payment from your credit report. Let's say you make $24,000 a year rental income from a residential property. Let's also say that you pay a $1,400 a month mortgage, report $1,200 in depreciation for the year, and have other expenses of $400 a month. Your net rental income is not $2,000 a month like you receive from your tenant, it's really $300 a month ($2,000 monthly income - $1,400 mortgage - $400 other expenses +$100 depreciation), this is the income you use for your calculation. Remember, don't double count the mortgage.
The other big item we see is Schedule E businesses such as your ownership of an S corporation, partnership or LLC. The banks are very different here. Some only use net income shown at the bottom of the schedule and reported on page 1 of your return, some will only use distributions from businesses as opposed to reported income. Truly, from a cash flow standpoint, you are only receiving what is distributed to you even though you are paying taxes on what has been reported. If the company is showing a loss, this definitely may negatively affect you. Please call us for more details here.
I hope that gives you some basics on the debt to income ratio.
If you have any questions about boat loans, rv loans, yacht financing or boat refinancing, please give me a call at 954-847-1500.
Thanks and have a great day!
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