Editor’s Note: The following advice column was written by Lorraine Mariotti, vice president of lending for Priority One Financial Services. Priority One has been serving the marine and RV industry since 1987. Acquired in 2007 by Forest River Inc. a Berkshire Hathaway Inc. company, Priority One serves as the F&I managed services provider for hundreds of dealers nationwide. For more information, visit www.P1FS.com.
Co-buyers aren’t the solution for every credit-challenged customer you see, but savvy F&I managers know when a co-buyer will help secure a recreational loan approval and when they won’t. Of course, a lot of this depends on your lenders’ guidelines as well as the amount financed, but knowing when to seek a co-buyer and when not to can help save you and your customer precious time when working on an approval.
It is a misconception that co-buyer and co-signer mean the same thing. They do not. Most lenders use these terms differently, so be sure to understand your lender’s definition. Typically, lenders define a “co-buyer” as a person who has equal ownership (deposit, monthly payments, tax and insurance) of the unit and equal liability (subject to collection on payment defaults). The definition of a “co-signer” is someone who signs the loan with the primary buyer and is obligated to make the payment if the primary buyer does not. A co-signer usually has no ownership in the unit.
Qualified co-signers are used extensively in the automobile business; however, co-signers are typically non-existent when it comes to recreational lending. Why? Unfortunately, lenders have stricter underwriting guidelines for boats and RVs and lenders believe that in most cases if a person doesn’t qualify for the loan on their own, a co-signer won’t help that person qualify either. For the purposes of this article, the term “co-buyer” will be used, indicating a borrower who will have equal ownership in the unit.
A co-buyer is an important tool in an F&I manager’s toolbox and can help secure a recreational loan approval in the following ways: When the total annual income of one buyer is not enough to meet the requirements of the loan. If there is a high debt-to-income ratio, using an employed spouse as a co-buyer can effectively speed up the approval process. When trying to improve guidelines for revolving debt. When trying to qualify the original applicant for a better credit score. When the original applicant has a good credit history, but could be somewhat light in the area of comparable installment history.
Co-buyers can be a husband and wife, a parent and child, significant other, siblings, or close friends, but typically recreational lenders look for a co-buyer to be living at the same address as the buyer and have a vested interest in the purchase. It is important for the co-buyer to understand that he or she is making a large, long term commitment when agreeing to become a co-buyer and not just to help the original applicant become approved for the loan. A co-buyer is just as responsible for the loan as the original buyer.
They are considered a joint owner of the purchase, so the co-buyer is equally responsible for the repayment of the loan. The loan will appear on the co-buyer’s credit bureau as an obligation, and it will figure into the co-buyer’s individual debts. If the buyer makes a late payment, or if the unit is ultimately repossessed, this will also reflect on the co-buyer’s credit bureau. Both the buyer and co-buyer are named on the loan contract and on the title.
A co-buyer typically cannot help secure recreational loan approvals when:
- The buyer has derogatory credit. Lenders qualify each applicant’s credit individually. If one applicant does not qualify, the entire application is declined. Lenders view co-buyers as adding strength but not solely supporting a loan.
- A spouse who has no additional income sources. Actually, this particular buyer can even hurt the loan approval process.
- Additional debt is brought to the equation, which is not entirely offset by their added income.
A good F&I manager will add the co-buyer’s information (if helpful) when they first submit the application to their lenders to save time and to maintain acceptable funding ratios with their lenders. Additionally, an F&I manager should set proper expectations with their customers as to how a co-buyer can or can’t help secure a recreational loan approval right from the beginning and not wait until the loan has been declined to bring the subject up. When to add a co-buyer and setting the proper customer expectations is critical in today’s sales and lending environment and gives your dealership the best chance at securing an approval and delivering a unit to the customer.