Archive for July 2016

Gambling and getting a loan

rejected-loan-applicationFirst off, I think it’s important to say that gambling is a choice that plenty of people make without a lot of negative consequences. But I had an interesting experience with a client a while ago and I think it’s worth sharing, because if you gamble, you may be surprised when you apply for a loan.

I had a client who pulled in $200,000 annually as his net income. That’s a pretty decent income! This client had a property that was worth a few hundred thousand dollars that was two-thirds of the way paid off. So it had a really good loan-to-value rate (33%).

He went to the bank to get a loan to refinance the rest of the property value plus $40,000, which would have put the property at about a 50% loan-to-value rate.

That’d be a really good deal for the bank, in my opinion—they wouldn’t lose any money if something went bad on the loan. It all looked really great on paper, up until we got to his tax return.

I gave the banker his tax return, and the banker called me up. He told me that they were not able to work with us on this loan. I asked him why, and he said it was because of the tax return.

My client had $72,000 in gambling winnings that year. And I was aware of this, but it wasn’t a part of his $200,000 annual net income. What’s more, he spent $76,000 to get that $72,000. He and I had talked about it, and gambling’s simply a hobby for him. Instead of throwing horseshoes or playing golf, he goes to the casino with friends. And when you look at it that way, he spent about $4,000 that year on the hobby, which isn’t too bad for a hobby.

When I explained this to the banker, he agreed with me on one level, but his hands were tied by the bank’s policy. For their purposes, that amount of money being gambled counts as an addiction. As an addiction, he argued, what will an addict not do to support his addiction? We’re out.

Because of my client’s hobby, the bank would not consider the loan. When I talk with other clients who gamble now, I let them know about this possibility. I tell them that it’s possible a bank will turn them down when they’re looking to finance something, because of this hobby. Because they’ll think it’s a “gambling problem.”

The bank is looking at a gambling hobby as an automatically high-risk behavior, like smoking is seen by insurance companies when you apply for life insurance. As casinos are becoming more popular, this is important to know. It may seem like no big deal, but if you have gambling winnings on your tax return, that could jeopardize your ability to get a loan in the future.

This has trickle-down effects, too. Want to get a new home, a lake property, a loan for your child’s college education? This could be affected by a gambling hobby. If you’re a business owner who gambles and you need to buy a pricey new piece of equipment, the bank may not approve a loan for you if they consider you to have an addiction.

This isn’t a judgement call—if you want to gamble, that is fine with me! But I don’t want you to be shocked if your bank is troubled by that.