Questions Aircraft Loan Underwriters Ask – Part 4 of 5 (Net Worth)
February 3, 2010 — AirFleet
As part of securing an aircraft loan, an underwriter will need to review the following: 1.) Credit Application, 2.) Credit Report, 3.) Cash Flows, 4.) Net Worth, and 5.) the Aircraft information itself.
As a part of an educational series, we are addressing each of these components separately and reviewing some of the questions the lender tries to answer through analysis of a client’s credit package. This should provide some insight into what a loan officer is trying to accomplish by requesting certain information.
In this article, we’ll discuss the evaluation an underwriter makes to determine the applicant’s net worth – an important piece in determining overall financial health:
- What is net worth? Net worth is a calculation of the applicant’s total assets less their total liabilities. In order to calculate this, the customer is asked to fill out a personal financial statement indicating what they own versus what they owe. Oftentimes customers will have a separate, more detailed, personal financial statement that they may attach in lieu of that section on the application.
- What assets/liabilities are typically included in the calculation? In true net worth calculation, anything you own can be recorded at market value in a personal financial statement. For aircraft financing (and to keep it simple), the assets we are interested in usually include real estate, cash, marketable securities (ie, stocks), non-marketable securities (ie, retirement account), accounts receivable, and other items such as cars, boats, or other aircraft. The liabilities we are interested in usually include real estate mortgage balances, secured notes payable (ie, car), unsecured notes payable (ie, credit card), unpaid taxes, and accounts payable.
- Why is net worth important to the lender? Net worth is a good overall indicator of financial health. It gives the lender a snapshot of what is going on with the applicant – what they have to fall back on, their liquid position, and how leveraged they are with other obligations.
- What is a customer’s typical net worth? This range will vary depending on each buyer’s financial situation (such as cash position, etc.), but as a typical point of reference, aircraft lenders find the average net worth to be somewhere around 10X the amount of the aircraft note. (ie, a $4 million net worth for a $400,000 loan).