The boat financing process is a dance. Make sure you know the steps.
Have you been shopping at the boat shows? You know, dreamily wandering the docks with that look of “someday” on your face? Well, maybe someday is here and it’s time to start the boat loan lambada. The lending climate couldn’t be any more amenable to putting you behind the wheel of something fast and shiny by summer, so arm yourself with a thorough understanding of the financing process and get ready to cast off.
Approximately half of all boats purchased are financed, and that percentage gets higher with purchases of new boats. Securing marine financing is usually faster than with real estate, and working with marine lenders (vs. a personal banker) has its advantages:
• They know the industry.
• They can process paperwork faster.
• They provide worksheets with guidelines.
• They have referrals for insurance or other boat ownership needs.
• They have experience placing financed boats into LLCs or family trusts.
So where to begin? A self-prequalification will start with a check of your credit score, which can be provided free by your credit card company. If it is 700 or better, you are the type of buyer lenders want to work with, according to Peggy Bodenreider, regional manager at Sterling Acceptance Corp. (sterlingacceptance.com), a marine lender in Southern California.
Not there? Don’t despair. Scores in the high 600s may be acceptable. “The score is important,” Bodenreider said, “but so is the overall history, length of time the applicant has had a credit file, recent spending patterns and repayment history on loans of comparable size to the boat loan request.”
Michael Bryant, past president of the National Marine Lenders Association (NMLA) and principal at Trident Funding Corp. (tridentfunding.com), said turning to online loan sourcing may work against consumers.
“The individual as a whole doesn’t really come across to lenders when applying online,” Bryant said. “We review the stability of the individual and can help explain issues like a divorce, a larger purchase (as of a home), or a sale (as of a business) that will alter the debt-to-income ratios and credit scores. We present the whole person — it’s what we get paid to do.”
In your self-assessment, also consider discretionary income each month — how much can you put toward your new lifestyle? — whether your job looks stable and what ongoing expenses boating will add, such as slip fees, upgrades and fuel, and maintenance and insurance costs.
What will make you a more attractive borrower?
• A reasonable debt-to-equity ratio (too many loans make you look overextended)
• Loans of a similar size (shows you won’t be overwhelmed by a boat)
• Good liquidity after down payment (should have 12 months of payments available if employment changes)
• Owning your home (makes good collateral)
• A high net worth (a 2:1 equity-to-debt ratio is good)
• Prior boating experience (shows you know what you’re in for financially and that you probably won’t wreck the bank’s asset)
If you’ve passed your own test, it’s time for a real preapproval. Why get one? It tells the boat broker or dealer that you’re a serious candidate and will give you more bargaining power in terms of price or added options. It also gets the messy stuff out of the way, so you can focus on getting a boat.
“We want the rest of the experience to be nice, and preapproval really moves things along,” Bodenreider said.
When is it too early for preapproval? If you have no idea whether to buy a center console fishing boat or a 60-foot offshore yacht, it may be too early for lenders to start checking your credit, because too many inquiries can be problematic when you’re really ready. But if you’ve identified one or two models from one or two builders, preapproval will actually make you a more attractive purchaser. Preapprovals have some longevity — usually a few months. But ratios can change, so an update may be required if you’ve been shopping longer than 60 to 90 days.
Accumulating the necessary documents is the hardest part of preapproval. You need a copy of your bank statements, two years of tax returns, a real estate schedule, corporate returns (for a business owner) or other proof of self-employed income.
“The real issue is getting the package together,” Bryant said. “But today it can mostly be submitted electronically, so it’s easier and faster.”
For new boats, the process is usually guided by the dealer. Once a loan has been approved, and there’s a copy of the Builder’s Certificate and/or Manufacturer’s Statement of Origin, digital photos of the boat and a HIN to confirm it is completed, then loan documents can be ordered. Assuming the boat is in the U.S., it takes about five business days from the day documents are ordered to the time the loan is funded. If the boat is outside the U.S., depending on the lender, copies of shipping documents may be needed, or there can be a wait until the boat has cleared U.S. customs.
The financing process and timeframes for pre-owned boats is pretty much the same. The boat broker can facilitate much of the process by providing referrals to surveyors and insurance companies, finding comps and holding the deposit in escrow. You’ll need to get (and pay for) a survey and provide a copy of the report to the lender, and that may add time.
“We also get copies of the current title or Certificate of Documentation for the boat,” Bodenreider said.
Once the buyer has accepted the vessel, the abstract of title is ordered, which takes a day or two to get from the National Vessel Documentation Center. This is used to determine ownership and if there are any loans/liens against the boat. Bodenreider said Sterling Acceptance pays any loans and/or liens from its loan proceeds, so it gets a free and clear title for its borrower and lender. At that point loan documents are ordered, including paperwork for the seller to sign, and it takes about five business days to receive all properly executed papers, forward them to the bank for review and book the loan.
During the downturn, delinquencies hit an all-time high of more than 2 percent, boat values declined by one-third (more than car values) and repossessions were common. Banks were left holding depreciating assets, for which there was no market, and the more “unique” the boat, the more difficult it was to unload. Before you buy the boat, consider how difficult it will be to sell it again.
Once the paperwork is done and the application is submitted, expect a turnaround of two to five days. Some lenders fund their own loans, so it’s faster. It does get busier around boat shows as more loans are requested, and that may add time.
“The business is a bit seasonal,” Bodenreider said. “The first two quarters are strong, and then it picks up again in September and October.”
The closing process usually takes one or two hours once the loan is funded and doesn’t have to be conducted in a stuffy office. “We are flexible and come to the borrower’s home or place of business, even after hours, to get things wrapped up,” Bryant said.
Boaters today can expect a standard 20/20/4-5 loan — a 20-year loan with a 20 percent down payment at 4 to 5 percent interest — to be processed quickly and relatively hassle free, especially on larger loans. Most lenders offer 15-year financing on loans of $50,000 to $99,999 and 20-year financing on loans of $100,000 or more. Rates (when this story was being compiled) for loans of $100,000 or more start at 4.6 percent. Some lenders, according to Bodenreider, offer a quarter of a percent discount for 800 or better credit scores, and some also offer a quarter of a percent discount for shorter terms and better equity positions.
So what are the options if the decision from a lender comes back negative? “The key is to work with a finance broker that has a stable of good lenders, so there are options,” Bryant said. “Also, brokers can explain that a different coverage is possible that may lower replacement cost and make the deal more attractive to the lender. And you can also make a counteroffer with a higher down payment if the debt ratio is too high.”
“Sometimes the borrower has limited boating experience and the lender may hesitate,” Bodenreider said. “In that case, looking for a smaller or newer boat may make the lender more comfortable and still work for the buyer’s needs.”