As we continue to process COVID-19’s effect on our society, there are unintended consequences that will affect the long-term tax and financial planning for yacht crewmembers. One of those unintended consequences is that the U.S. federal government has flooded the capital markets with liquidity and this, in turn, results in lower interest rates. Whenever interest rates begin falling, homeowners will weigh the option of refinancing their homes. In addition to refinancing homes, the consequences of high unemployment will result in homes being put up for sale and this may present buying opportunities for potential homebuyers.
One of the problems that yacht crew face when obtaining or refinancing a mortgage is income verification, which is the screening method that a lender may use to confirm that the borrower has a stable source of income (that comes from a legal occupation).
One of the problems that yacht crew face when obtaining or refinancing a mortgage is income verification, which is the screening method that a lender may use to confirm that the borrower has a stable source of income (that comes from a legal occupation). Typically, there are three steps to verifying income:
- Paycheck stubs, W-2s, bank statements, and requesting IRS transcripts to confirm tax returns have been filed.
- Conducting an employment verification.
- Running a credit check.
While most mainstream borrowers will have no problem complying with these requests, yacht crew sometimes face unique circumstances that make things difficult. Not only can employment changes make income verification difficult, but so can employment gaps. Typically, the lender likes to see at least two years of being treated as either an employee or two consecutive years as a contractor. This poses a problem when a crewmember is treated as an employee on one vessel and then as a contractor on another.
Crewmembers who plan years ahead are the ones with the most success in obtaining financing. Say you worked as an employee and received a W-2 in year one, but in year two, you’re offered two similar jobs: one that issues a W-2 and one that pays you as a contractor. Consider taking the job that pays you as an employee because this will preserve the consistency of employment that lenders like to see. The same is true for gaps of employment — if you’re thinking of leaving a vessel, you might want to stay on board while searching for a home. Though a gap of employment is considered a benefit in the maritime industry, a gap of employment is a red flag to a lender.
Another small consideration would be to use a mortgage broker or lender familiar with the yachting industry. Some lenders aren’t familiar with the yachting industry, which is why they’re unable to grasp how an individual might work on a foreign-flagged vessel without being issued a W-2, or how a foreign employer might not want to withhold taxes or issue a 1099.
Lastly, make sure your tax returns are up to date and have been filed with the IRS. Sometimes, members of the yachting community tend to file their tax returns after the due date has passed.
This article originally ran in the September 2020 issue of Dockwalk.