Occasionally, landlords will come across applicants that seem great on paper but do not quite meet the income or credit requirements. When this occurs, landlords have two options, deny them and lose a potentially good tenant or allow the applicant to have a cosigner. That said, not every rental owner is familiar with the practice of cosigners or how to protect themselves best. So, join us as we walk you through what it means to have a cosigner on a lease, their desired qualifications, and key responsibilities below.
What is a Cosigner?
A cosigner is a third party who is financially accountable should the tenant be unable to pay the rent. While this person is liable for payment, they do not typically live in the rental property. For example, a parent may cosign for a student going off to college and renting their first apartment.
Reasons Why a Tenant May Need a Cosigner
There are plenty of reasons why a prospective tenant looking to lease your rental may need a cosigner to seal the deal. These include insufficient income, lack of rental history, or questionable credit. In these situations, having a co-signer provides landlords added peace of mind about approving the applicant. Let’s dive a little deeper into these reasons to have a cosigner below.
It is widely accepted that those spending over 30% of their gross monthly income on rent may encounter problems paying on time and in full at one point or another. Therefore, verifying the tenant has a steady and sufficient source of income is necessary for landlords.
However, for those bouncing back from the pandemic, changing life circumstances, or looking to live on their own for the first time, meeting this requirement can be tough. That said, if a tenant meets other requirements in every way, allowing a high-quality applicant to have a cosigner is a great option.
The key here is to have stringent cosigner requirements as well. This is not a matter of simply choosing anyone; the cosigner must have sufficient income for their own bills and the rent if the tenant cannot cover it.
Lack of Sufficient Rental History
Evaluating the type of tenant an applicant has been is a good predictor of the tenant they will be in the future. Hence, verifying previous landlord references is an essential part of the screening process.
But what if your tenant has never leased before?
While this may seem like a risky situation, it is worth considering other factors of the total application. In the instance of no rental history, a cosigner may or may not be necessary. Even though a cosigner offers some peace of mind, consider
factors such as creditworthiness, personal references, and income verification. This gives landlords a good insight into whether applicants can and will pay.
Questionable Credit History
One great way to gauge a tenant’s ability to pay rent on time is to perform a thorough credit check. A credit report shows a complete financial picture, including any late payments, outstanding judgments, bankruptcy, or large debts. Therefore, landlords must take note of the whole package and not just the numerical credit score when deciding between applicants.
The truth is that credit scores give property owners a preview of past behavior. A low credit score, or even worse, no credit score, can mean that payments have been missed, too much credit has been taken out, and the responsibility to handle a tenancy is simply nonexistent.
However, it is important to assess each low credit score rating on a case-by-case basis. For example, a young person that hasn’t had time to build a good credit score is one thing. On the other hand, a tenant that cannot handle the responsibility of making bill payments on time and thus has a low credit score is an entirely different thing. Thus, even with a cosigner in place to help alleviate these problems, you may decide it is not worth the risk.
Many circumstances could impact a credit score, such as large medical debt or bankruptcy after a divorce. That said, if you have a tenant that has plenty of income, solid references, and seems like a great match, yet has a low credit score, consider having them enlist a cosigner.
What Does It Mean to Have a Cosigner for Your Rental Property?
If the tenant leasing your property cannot fulfill their financial obligation under the lease for whatever reason, the cosigner then takes on all responsibility of making the payment in full. Thus, the tenant can ward off eviction, and the landlord receives the full rent due.
The Requirements to Cosign for a Lease
Just like the applicant themselves, a cosigner must meet certain screening criteria in order to qualify. That said, there are several things landlords can request of a cosigner before accepting them as a financial backer, including –
- Cosigners must complete a rental application complete with an application fee
- Submit to a full credit check complete with credit check fee
- Proof of steady employment
- Complete financial history
- Proof of income equal to approximately 6 times the monthly rent
For landlords, the key is to screen the cosigner just as you would an actual tenant. Thus, ensuring they are a good fit and can be relied upon to pay rent if the tenant cannot.
What are the Responsibilities of the Cosigner Under a Lease?
Becoming a cosigner is not something to take lightly. Therefore, if you choose to allow a cosigner for your tenant, they must understand the following responsibilities –
- If the tenant breaks the lease, the cosigner can be sought for unpaid rent
- Any unpaid tenant damages become the responsibility of the cosigner
- If the tenant has roommates, the cosigner signs for the entire lease and the full rent amount, not just one roommate’s portion. The cosigner is not living in the rental property but agrees to take on the full financial obligations of the agreement, regardless of who is at fault for non-payment (the tenant or possible roommates).
The Pros and Cons of Allowing Lease Cosigners
For all decisions landlords make, there are benefits and disadvantages to weigh. If you are on the fence of whether or not to establish policies to allow cosigners, consider the following –
Benefits of Accepting Cosigners
- Limit Financial Risk – Even the most well-intentioned tenant can fall on hard times. When landlords have a cosigner in place, it adds the extra assurance that rent will be paid.
- Expand the Tenant Pool – Not every tenant can meet the standard qualifications for a variety of reasons. Depending on the target market of your local market, allowing cosigners can expand your tenant pool. For example, if your property is in a college town popular to students, many may not have sufficient rental or credit history to rent on their own.
- Edge Out the Competition – Rental properties are a competitive industry. So, any advantage your property has over another is a good thing. Allowing cosigners under certain circumstances allows you to accept tenants that other owners may deem a higher risk. While allowing a cosigner is still a risk, reviewing all of the screening criteria involved creates a calculated risk that pays off for many landlords.
- Checks and Balances – A cosigner can act as an additional layer of accountability for the tenant. Since they likely do not want to pay extra bills besides their own, they can help ensure the tenant pays on time.
The Cons of Accepting a Lease Cosigner
- No Guarantees – Although a cosigner accounts for the financial end of the agreement, they cannot guarantee tenant behavior. So, landlords may find themselves dealing with excessive noise, damage, or other questionable behavior.
- Added Administrative Costs – Having additional applicants in the form of a cosigner apply means more screening work for landlords. While not a dealbreaker for most, it is something to plan for.
- Rules and Regulations – Depending on where your property is, specific laws and rules may apply to how landlords can pursue delinquent rent. This includes when and how to go after a cosigner. So, review local laws before making a cosigner policy.
How to Protect Your Rental Business Interests
As a rental property owner, it is vital to approach your business objectively, and leasing a valuable rental property can be difficult when trying to collect full rent every month. Yet, employing a property management company, such as Bay Property Management Group, gives owners some much-needed peace of mind.
With thorough tenant screening procedures, strict rent collection policies, the ability to back you in court in the case of non-payment, and the willingness to manage all other things property-related, owning a rental property can become the enjoyable experience it should be with full-service management. If you are wondering if accepting lease cosigners is right for you or just want to see if you could get more for your investment, contact Bay Management Group today.