Cosigners and Guarantors: 4 Things You Must Know
You may be fortunate enough to find a qualified tenant and do not need to consider guarantors or cosigners. But when all of your applicants do not meet the rental property’s qualifications, then a guarantor should be considered.
#1 When to engage a guarantor or cosigner
Before determining whether a guarantor or cosigner is needed, landlords should set objective criteria on which applicants can qualify for the rental. Objective criteria is unbiased and helps avoid claims that a landlord is discriminating, as outlined in Fair Housing. Some examples of objective criteria that you can use to qualify an applicant are:
- Income over $5,000 per month
- Credit score over 650
- No pets
For no pets, it is important to note that service animals and emotional support animals are not considered pets. You can read more here.
When an applicant does not meet your objective criteria, you can request a guarantor or cosigner who meets the minimum qualifications to be on the lease with the tenant. Accepting a cosigner or guarantor can be an excellent way to reduce vacancy and move a tenant into your rental property sooner.
The most common use cases for a guarantor or cosigner are when someone has no credit or low income. For example, foreigners and students often do not have US credit and therefore are asked to provide a guarantor or cosigner.
#2 Important distinction between a cosigner and a guarantor
The terms cosigner and guarantor are often used interchangeably, but they follow a very different sets of rules, laws, and obligations. Cosigners have equal responsibility for payment of monthly rental costs, while a guarantor is generally sought for payment only when the property occupant is unable to make the rental payment. Cosigners are listed on rental agreements as having equal responsibility for making the rental payments, while the guarantor is listed as a secondary source.
A cosigner is at a slightly higher risk than a guarantor since the landlord is allowed to immediately seek payment from a cosigner. On the other hand, the guarantor is normally not responsible until the landlord exhausts legal methods for obtaining payment from the primary leaseholder. The guarantor does not have rights to access the apartment in the same capacity that a cosigner does. Cosigners are jointly responsible, guarantors are responsible after legal action is taken
Some landlords blend the two terms into the role of "cosigner/guarantor." Such agreement clauses clearly define the rights and responsibilities, which are usually closer to the classic definition of a guarantor rather than that of a cosigner. For example, signing as a "cosigner/guarantor" does not allow the secondary individual rights to occupy the apartment.
When someone is the guarantor on an apartment lease, they give their legal guarantee that rent on that property will be paid. They are also responsible for paying any fees or damages on that property beyond normal wear and tear. If you have a solid lease agreement, then a guarantor and a cosigner will be responsible for financial damages. These would include:
- Non-payment of rent by the tenant
- Late fees from the tenant
- Maintenance and other damages that may be the responsibility of the tenant
Rather than denying an applicant with a bad credit score or low income, you can mitigate your risk with a guarantor.
#3 Benefits of a guarantor or cosigner
If a tenant needs a guarantor or cosigner, they usually do not have the credit to purchase a house. Tenants will typically rent for a longer duration, as they don’t want to go through the application and screening process again. Longer term tenants are better because they will reduce turnover and vacancy costs for you.
And, it is simple to add a guarantor or cosigner. Landlords will want to include one clause in the lease agreement, with a signature line for the guarantor. Check with a local real estate lawyer as you may also want a short amendment or secondary contract. The guarantor should receive a full copy of the entire lease agreement, since he or she will be responsible for its conditions, just as the primary leaseholder is.
#4 Understand risks with a guarantor or cosigner
A guarantor or cosigner can provide the necessary payment when a lease is violated. But, you want to ensure the tenant is responsible and does not cause headaches for you. If the tenant has low credit, will they also be irresponsible with maintaining the rental (e.g. cleaning, ontime payments, etc.)?
Guarantors help to mitigate risk on rent payments, but they cannot ensure that the tenant’s personal behavior will be respectful. There is always a small chance that the tenant is irresponsible. And remember, no credit is better than low credit!
Allowing guarantors can help to protect your rental income and allow you to be more flexible with your criteria extending beyond the tenant living in your rental. But, if you decide to accept a cosigner or guarantor with your tenant, be sure to pull a credit report on both the cosigner/guarantor and the tenant.