The Three Things Every Lender Is Looking for In a Borrower

Lenders generally key in on three primary things in loan approval: credit, income, and liquidity.

Credit History

They’re typically looking for a credit score of 700 or better, plus a clean credit history. A clean credit history means no bankruptcies, foreclosures, outstanding collections, recent delinquencies, or late payments.

An aircraft loan is an installment loan secured by the aircraft. Therefore lenders are looking to see if the applicant has had similar loans in the recent past. Car, boat, or RV loans are examples. Even a mortgage. Lenders want to see that you have both the ability and a history of making similar monthly payments over a long period of time.

Income

Next lenders look at income. Taxable income as reported on tax returns is the most common way for lenders to determine income. If you are a W-2 wage earner, it’s a very straight-forward process. Business owners are often more complicated because their income may not be provided on a simple, annual statement.  Income for someone who is self-employed or who owns a business could include income from Schedule C (sole proprietorship), Schedule E (rentals, royalties, partnerships, or sub-s corporations) or Schedule F for farming or ranching-related income.  In the case of partnerships or S corporations, business tax returns and K-1s must also be submitted in addition to the personal taxes.

From these forms, the lender will derive net income, and then add back in any depreciation or interest expense claimed. From that calculation, they will determine the business owner’s income, which may look insufficient at first. But because it's common for business owners to have access to much more money than their tax returns indicate, AOPA Finance can help members paint a comprehensive financial picture and point them to a lender who can work with their unique situation.

Documenting income for retirees can sometimes be a little tricky. Social Security and pension income may be taxable, and therefore documented, but other types of income, including disability and military retirement payments may not be. With nontaxable retirement revenue streams, lenders will require an award letter or a statement showing the monthly benefit amount to include that income. Trust fund beneficiaries bear the same burden to prove income through account statements, both present and historical.

Once the income number is determined, lenders then calculate your debt-to-income ratio. It’s a comparison of monthly income to monthly debt service requirements. Note, it is not the total amount of debt, but the total amount of minimum monthly payments due. To qualify for an aircraft loan, the debt-to-income ratio cannot be greater than 40% to 45% of monthly income.

Liquidity

The last of the three criteria is liquidity. Liquidity means cash in the bank or in non-retirement investment accounts, like Treasury bills, stocks, bonds, mutual funds, etc. Liquidity is not equity in your home, in other vehicles, on an insurance policy, or in funds from a protected, tax-advantaged retirement account. One more thing—lenders do not allow people to “borrow to borrow.” An example would be taking out a loan on a 401(k) or on a life insurance policy to cover the down payment.

Liquidity sufficient to make the down payment and to cover additional expenses is necessary to demonstrate an ability to maintain the airplane. Those costs include fuel, hangar fees, insurance, regular maintenance, and reserves for overhauls. Generally, lenders like to see that the buyer has the down payment plus enough liquidity for 12 to 18 months of aircraft loan payments.

Do you have a question about aircraft financing? Our team has the answer for you! Submit your questions here. Great terms. Helpful and responsive reps. Those are the reasons to turn to AOPA Aviation Finance when buying an airplane. If you need a dependable financing source with people on your side, call 800.62.PLANE (75263) or click here to request a quote.