Allowing Tenant To Have A Co-signer On Lease | Should You?
Landlords often allow tenants to have a co-signer on lease when a tenant can’t meet the credit requirement to rent their place. But is it a smart move or there is something a landlord should know before having a cosigner on the lease agreement?
Who is a Co-Signer?
A Co-Signer is a third party who along with the tenant assumes the responsibility of the lease. For cases, when the tenant is unable to meet the financial obligations of the lease. The co-signer guarantees to fulfill it. He is responsible for the rent payments but also for any money owed by the tenant towards the landlord.
Is a Co-Signer the same as a Guarantor?
A Co-signer is more like a guarantor but has extended rights compared to a guarantor. The Third-party who is signing only as a guarantor cannot occupy your rental apartment but a co-signer can.
Furthermore, a guarantor comes into the picture when the tenant completely stops paying the rent. But a cosigner is even responsible to pay when the rent is currently due.
A Cosigner is technically a co-tenant who just is not occupying the space as a tenant but can. And not assuming complete lease responsibilities but only the financial ones.
Typical Co-Signer Situations
Most often you see parents co-sign the lease for their children. Such children can be someone who is pursuing a college degree or even a fresh graduate who has no prior verifiable rental and credit history.
You might also get such prospects for your rental property. And if yes, do you allow them to rent from you or not?
I had such a prospect last week for one of my rental apartment buildings. And, I quickly thought what can go wrong if I rent to him when his father is ready to co-sign the lease?
Does It Make Sense For You to Allow a Co-signer on Lease?
Why not? You are filling the vacancy after all. I felt the same too. But it can turn upside down. You need to be careful and must do proper due diligence before allowing this arrangement.
No Landlord including me would like a vacancy anyway. A vacant apartment loses money every month and a negative cash cow can quickly empty your deepened pockets.
So, it perfectly makes sense for the landlords to allow your tenant to have a cosigner when it’s needed. Overall, if you see, allowing cosigner on lease provides landlords
- A Better Opportunity To Fill Vacancies Faster
You will never rent to a person who doesn’t fulfill the credit requirement of your rental criteria. But by allowing such prospects to have a cosigner that fulfills the credit requirements, you got the check boxes ticked.
But, if you completely cut corners with such prospects and don’t allow co-signers, you miss out on the opportunity to fill your vacant rental unit faster.
- A Way To Minimize Rent Delinquencies
As landlords, we don’t rent to a person who doesn`t match the credit requirements because there is a risk of occurring to rent defaults. But by having a cosigner assume the financial obligation of the lease, you are minimizing such a risk.
In my opinion, every landlord should let a tenant have an eligible cosigner when a tenant can’t match up your rental criteria. But you should take this move with caution.
What caution, will you ask? Let me explain.
When Should You Allow Tenant to Have a Co-signer on Lease?
The Prospect who wants to rent one of my apartments that I was talking about, is a fresh graduate and came to this new state for his first job. He is renting for the first time. Hence, he has no prior rental and credit history to verify from.
So, his father who has a steady job is happy to sign as a cosigner. His father ticks all boxes of my rental criteria. So I felt safe and then finally rented out my apartment to this tenant.
But let me ask you what if this prospect has a bad credit history rather than no history? Would you have rented to this prospect? Neither you nor I would have rented to him, even though his father would be ready to sign as a co-signer.
There is a difference between having a bad credit history or no credit history.
You are getting my point?
You should only allow tenants to have a cosigner on the lease when at least the tenant ticks most of the boxes of your rental criteria if not all.
What Check boxes, I evaluated my tenant for???
- No Criminal Record: ✓
- Employment Status: ✓ (Has a Steady Job)
- Credit History: Χ (Not Available but has no Current Debt)
- Debt To Income Ratio: ✓ (Not more than 35%)
- Previous Rental History: Χ (Not available)
- Tax Lien: ✓ (No Tax Lien)
Common Situations When Landlords Have Co-signers On Lease
Have Co-Signer For Less Income
Landlords require Tenants to have a co-signer when they don’t meet the minimum income requirement. Allowing a Prospect to have a cosigner in this situation is a good idea. But you should never allow one such prospect to rent from you if the rent is more than 35% of his current income.
Have Co signer For Low Credit Score
You can definitely have a cosigner sign the lease with your tenant in this case. But remember to ask this tenant of all the possible causes why he has a low credit score. And, if during credit checks, you find it as a result of multiple late card payments, or missed EMIs, or maybe bankruptcy. You should definitely stay away from renting to this tenant or use your own discretion. A low credit score tenant with a cosigner is still acceptable if it is due to the tenant having no borrowing history at all.
Require a Cosigner For Tenant Having Eviction on Record
An eviction history generally stays on the record for 7 years. And if a tenant has an eviction on record, you may require him to have a cosigner. But you must clearly evaluate the grounds of eviction before renting to such a tenant. Because no matter, you have a cosigner, but situations can still get ugly.
Have Cosigner for No Rental History
Having a cosigner sign the lease for someone who has no prior rental history makes sense. But you should ensure that the cosigner ticks all the other checkboxes in your background verification, as I also said above.
Landlord Tips For Co-Signer For Rental Property
Not just allow any person to co-sign for the tenant. A Landlord should be sane to understand who to allow to cosign the lease. A Cosigner must match the intention of the landlord.
Allow only a related Co-signer For Lease
Your tenant is having someone to cosign the lease doesn`t necessarily mean your worries have been answered. What if your tenant is bringing someone to co-sign the lease who barely knows him enough. The co-signer maybe a colleague or a friend who just started to hang out with this tenant.
This co-signer may be assuming the responsibility of the lease but might have a view in his mind that his colleague or friend wouldn`t default on his payments. But if the tough time arises, whether the cosigner is actually able to pay the money?
“Not just have a cosigner for the sake of having one. Ensure that the co-signer is actually related to the tenant and can actually cover the obligation if the need arises.”
This brings me to my next point…
Screen the Co-Signer
It makes no sense to have a co-signer who can`t pay the money if the tenant defaults. So it becomes mandatory that you screen the co-signer as you would screen a tenant. The co-signer must meet all your credit requirements and has enough capability to cover on behalf of the tenant in need.
How To Add a Co-signer on Lease?
In order to add a cosigner to the lease, you require to attach a Co-Signer Agreement along with the lease. The Co-signer Agreement is signed by the cosigner on the behalf of the tenant specifying that the cosigner assumes the financial responsibility of the lease. Or for that matter, any lease modifications or extensions for which the cosigner is responsible.
A Typical Cosigner Agreement contains Information that includes
- Landlord Name
- Tenant Name
- Original Lease Signing Date
- Rental Property Location
- Co-Signer Proofs (Name, SSN, Driver`s License)
A Cosigner Agreement guarantees that the cosigner will cover the rent payment and other such financial obligations if the tenant fails to execute his obligations. So, it becomes important that you particularly use a state complaint Co-Signer Agreement to avoid messy situations.
Cosigner on Lease Rights
Landlords must know the Cosigner`s Lease Rights. Though Cosigners are legally bound to comply with the obligations unless the lease term ends. But still, you must be aware of certain situations that can happen with this arrangement.
- Can a Cosigner End the Lease?
- Can a Cosigner Get his name off the lease?
A Cosigner can end the lease or get his name off the lease. But only on the condition if all the binding parties agree to it. So, technically, a co-signer cannot end the lease or remove his name on his own.
Rare but landlords sometimes allow co-signers to get off his name. If the tenant is on track after some months and can meet the required credit requirements alone, a cosigner can be removed. But if you see it serves no benefit to a landlord at all.
FAQs when having Cosigner on Lease
#1: Are You Legally Obligated To Allow a Cosigner?
No landlord is legally obligated to allow a cosigner. It is under your own discretion whether you allow it or not. Though allowing a cosigner is a conscious decision and can swing both ways. A Landlord has to be careful when allowing this arrangement.
#2: Does a Cosigner Need to be physically present?
It is an imperative question most landlords have in their mind. Most times, landlords have a tenant who has an out-of-state or out-of-country co-signer. And that co-signer cannot be physically present.
But if you see having a cosigner who can`t be present physically only adds to the complexity. You never get to meet that person. What if the tenant is forging some documents? Furthermore, imagine chasing someone out of the country. Will you be ready to take this extra trouble?
Alternative To Having Cosigner on Lease
As I said above, having a cosigner can swing both ways. And adding a cosigner on a lease can sometimes intensify the complexities.
Ask me how?
Think what if the cosigner also defaults?
You have a cosigner on lease. Your tenant defaults and now the co-signer is also giving you a hard time meeting his obligations. Don’t you think it’s a perfect cocktail of augmented complexities?
Hence, there are additional alternatives that you can consider other than having a cosigner.
A co-signer is not a sure-shot guarantee that you will have no trouble in the future related to payment collection. It is simply an added cushion to absorb the shock.
Rent Guarantee Insurance
You can protect yourself from rent defaults with Rent Guarantee Insurance in case a tenant defaults on payments. A Rent Guarantee Insurance can protect the landlord`s income from rent defaults for up to 6 months.
Read: What is the Best Rent Guarantee Insurance For Landlords?
Taking a Higher Deposit
In order to minimize the risk of rent defaults, you can require your tenant to pay a higher security deposit. An extra deposit can cover you in case of defaults and damages. But be wary of how much extra deposit you take and what you use it for? States have specific guidelines for landlords on handling security deposits.
Read: The State Specific Guide For Landlords To Handle Security Deposits
Collect Rent Payment Online
Collecting rent payments online is no direct solution to reduce rent delinquencies. But it is more of a solution that encourages a tenant to pay on time. It’s time you also shake hands with automation like other landlords (if you haven’t already).
Also, there are certain online rent collection services that help tenants to report their rent payments to credit agencies which further helps them build their credit. And, this can be a pretty solid motivation for a tenant to pay rent on time.
Final Thoughts
Having a Co-signer sure provides a little safe ground to cover financial liability in case a tenant defaults. But even to get this safe ground, you need to exercise this co-signer arrangement very meticulously. And to seal the final thought, there can be nothing better than having the maximum layer of protection that you can have for your rental business.
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