Boat buyers of the past had it rough. They’d wade through choppy waters of marine lenders who only cared about one thing. Credit score sharks would circle, debt-to-income barracudas would snap, and net worth eels would slither in for the kill. It was like a scene out of “Jaws” except with lenders instead of a giant great white.
Thankfully, these days lenders have come to their senses and take all of these factors into account when making loan decisions. And specialized companies such as Trident Funding, which provides an easy and quick online boat loan application page make applying for boat loans and yacht financing a breeze.
But don’t jump overboard just yet, mate! It’s still important to read the entire article and chart a course to ensure you don’t get lost at sea financially. You don’t want to be stranded on a deserted island of debt. So, make careful plans to ensure that purchasing your dream boat is still achievable. Let’s keep the laughter buoyant and the finances steady!
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.
Trying to get a boat loan with poor credit history is a bit like trying to sail a boat without a compass, you may end up going in circles and getting lost.
Dave Patnaude, Vice President and Marine Client Manager at Bank of America, suggests that having a minimum credit score of 700 is crucial when looking for yacht or boat loans in today’s world. This score serves as the first step in the loan application process. Therefore, if you don’t currently have a credit score of 700 or higher, it’s advisable to focus on building a more robust credit history or repairing your credit if it’s damaged before embarking on your search for the perfect yacht or boat. It’s important to ensure that your credit score is up to par before browsing boats and yachts for sale online so that you don’t set your heart on something that is beyond your financial means.
Debt-To-Income Ratio (DTI)
Another very important consideration for lenders is your debt-to-income ratio (DTI). This ratio is a relationship between your gross monthly income versus your monthly obligations/expenses. It’s the number that tells lenders whether you’re drowning in debt, just treading water or swimming freely. Generally, lenders want to see a debt-to-income ratio of 35 percent or less, otherwise you may be in hot water. 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. So, if you’ve been holding onto that Beanie Baby collection from the 90s, now might be the time to cash in. Or if you’ve been collecting vintage cars and are lucky enough to have a 1963 Ferrari 250 GTO (valued at over $70 million USD) sitting in your garage, well, you might not even need a loan. Just sell that bad boys and buy whatever boat you want! Don’t worry though, if you don’t happen to own a priceless stash of Beanie Babies or the world’s most expensive car, even a modest car that you’ve 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 that is.
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.
Above: Lenders approve boat loans and yacht financing applications based on a number of financial factors. Photo via Pond5.
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!
Editor’s note: this article was last updated in April 2023 to reflect current financial information and market considerations.
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