A promising applicant doesn't quite meet your financial criteria, leaving you with a tough decision. A cosigner can bridge this gap, protecting your investment while giving a deserving applicant a home. After reading this guide, you will know when to consider a cosigner and how to structure the agreement to protect your rental business.
What Is a Cosigner on a Lease?
A cosigner, sometimes called a guarantor, is a third party who signs the lease agreement alongside the tenant. They do not live in the rental property. Their role is purely financial.
By signing the lease, the cosigner becomes legally responsible for all financial obligations of the agreement if the tenant fails to meet them. This includes unpaid rent, late fees, and the cost of any damages to the property. Essentially, they provide a financial safety net for you, the landlord.
It's important to distinguish a cosigner from a roommate. All adult residents living in the property should be on the lease as tenants. A cosigner, however, is a non-resident who is only involved as a financial backstop. Accepting a cosigner is a common practice, particularly for applicants who are building their financial history.
When Should You Require a Cosigner?
The decision to require a cosigner should be based on objective, written criteria that you apply uniformly to every single applicant. This consistency is the cornerstone of a fair and legal screening process. If an applicant falls short of your minimum standards in one or more areas, offering the option of a qualified cosigner can be a great solution.
Common Scenarios for a Cosigner
- Insufficient Income: The applicant's verifiable income does not meet your standard income-to-rent ratio. Many landlords look for a gross monthly income of three times the rent, but your standard should be based on your business needs and local market.
- Limited or No Credit History: An applicant may have no credit history because they are young or new to the country. A lack of credit history is not the same as a bad credit history. A cosigner can provide the financial reassurance you need in these cases.
- A Low Credit Score: If an applicant's credit score is below your minimum threshold, it can indicate a higher risk of non-payment. A creditworthy cosigner helps mitigate that specific risk.
- Unstable Employment History: Frequent job changes, short-term employment, or significant gaps in their work history could raise concerns about income stability.
A Critical Note on Fair Housing
Your policies for requiring a cosigner must be non-discriminatory. You cannot require a cosigner based on an applicant's race, religion, familial status, disability, or any other protected class. For example, you cannot have a policy of requiring cosigners for all applicants under a certain age or for all single parents.
The best practice is to establish your standard rental criteria first. Then, create a written policy that states: "If an applicant does not meet the minimum criteria for income or credit, we will consider a qualified cosigner who meets our requirements." This ensures you treat everyone equally.
How to Screen a Cosigner
A cosigner is only as good as their financial strength. Therefore, you must screen the potential cosigner just as thoroughly as you screen the primary applicant, if not more so. The cosigner must be strong enough financially to cover their own expenses and the full rent of your property.
The Cosigner Application Process
The process should be formal and documented.
- Require a Full Application: The potential cosigner must fill out and sign a complete rental application.
- Obtain Written Consent: Get their written permission to run credit and background checks. This is a legal requirement.
- Verify Everything: Just as with a tenant, verify the cosigner's income, employment, and rental history if applicable. Do not take their application at face value.
What to Look For in a Qualified Cosigner
- Excellent Credit: The cosigner should have a very strong credit score and a long, positive credit history with no major delinquencies.
- Sufficient and Stable Income: Many landlords require a cosigner's income to meet a higher threshold, such as five to six times the monthly rent. They need to prove they can comfortably carry the potential burden of an extra rent payment.
- Significant Assets: A person with substantial savings or property is a lower risk, as they have assets that could be used to cover the tenant's debt if necessary.
- A Note on Location: While you cannot require a cosigner to live in a certain area, it's a practical reality that collecting a debt is often easier and less expensive if the person lives in the same state. This is a logistical factor to consider, not a screening criterion.
Adding the Cosigner to the Lease Agreement
Simply screening a cosigner is not enough. To make the guarantee legally enforceable, it must be properly documented in your lease agreement. An oral promise is not sufficient. You have two primary methods for this.
Option 1: The Cosigner Signs the Main Lease
The most straightforward approach is to add the cosigner as a party to the lease agreement itself. They would be listed along with the tenant(s) and sign the document. This method clearly establishes their connection to the lease and its terms.
Option 2: Use a Separate Cosigner Addendum
A cosigner addendum, or a Lease Guaranty Agreement, is a separate document that is attached to and becomes part of the main lease. This document is signed by the tenant, the landlord, and the cosigner. It specifically details the cosigner's role and responsibilities, leaving no room for ambiguity.
Key Terms to Include in Your Agreement
Whether you use an addendum or add them to the lease, your agreement must contain specific language to be effective. Work with a local attorney or use a state-specific lease form to ensure compliance.
- "Joint and Several Liability": This is a critical legal phrase. It means that each person who signs the lease (tenants and cosigners) is individually responsible for the entire amount of rent and damages. You can legally pursue any one party for the full amount owed.
- Covered Obligations: The agreement should state that the cosigner is responsible for all financial obligations, including rent, late fees, pet fees, utilities, and costs related to damages beyond normal wear and tear.
- Duration of Obligation: Be clear about how long the guarantee lasts. Typically, it covers the initial lease term and any subsequent renewals, but your agreement must state this explicitly. Otherwise, a cosigner might argue their obligation ended after the first year.
Always verify your local and state laws. The enforceability of cosigner agreements and the processes for collection can vary significantly by jurisdiction.
Managing the Lease with a Cosigner
Once the lease is signed, the cosigner becomes a key party to the agreement. Good communication is essential for a smooth tenancy and for enforcing the guarantee if needed.
Communication is Key
Do not wait until a problem becomes a crisis to contact the cosigner. If rent is late by even a few days, notify both the tenant and the cosigner in writing at the same time. This keeps the cosigner aware of the situation and puts pressure on the tenant to resolve it quickly. Using a property management platform can help you automate these communications, ensuring all parties receive important notices promptly.
Handling Lease Renewals
Your lease agreement should specify whether the cosigner's guarantee automatically extends to lease renewals. It is a best practice to not assume it does. At the time of renewal, have the cosigner sign a new addendum or the new lease. This reaffirms their commitment and prevents any future disputes about their continued obligation.
The Pros and Cons of Accepting a Cosigner
Deciding whether to accept a cosigner is a business decision. Weigh the benefits against the potential drawbacks.
The Upside
- Reduced Financial Risk: A qualified cosigner provides a strong financial backstop, lowering the risk of lost rent.
- Wider Applicant Pool: You can consider a broader range of applicants, which is especially helpful in slower rental markets.
- Faster Vacancy Filling: Being more flexible can help you rent your property more quickly, minimizing costly vacancy periods.
The Downside
- More Administrative Work: Screening a second person adds time and effort to your application process.
- Collection Can Still Be Difficult: Having a guarantee doesn't mean payment is instant. If a cosigner refuses to pay, you may still have to pursue legal action, which can be costly and time-consuming.
- Potential for Tenant Complacency: In some cases, a tenant might be less diligent about paying on time if they know they have a safety net.
Your Next Step: Create Your Policy
A cosigner can be an excellent tool for protecting your investment and filling your properties. Success depends on a consistent process and an ironclad legal agreement. Before you need one, take the time to formalize your standards.
Your immediate next step is to create a written policy that defines when you will consider a cosigner and the minimum financial criteria that cosigner must meet. Having this policy ready ensures you can make fair, confident, and legally compliant decisions for every applicant who walks through the door.