Landlords often face this difficult question: should you allow cosigners for your rental property? A cosigner is a person who will not be living in the dwelling, but who agrees to pay the rent on the property if the tenant finds him- or herself short on funds. In some states, a cosigner is called a guarantor; it works similarly to a cosigner on a loan or automobile financing.
Usually, people who need cosigners are college students with little or no credit history or individuals whose salaries do not meet the financial obligations of the dwelling. People with poor credit or bankruptcies in their past may also need a cosigner in order to obtain a residential lease.
But should you allow your tenants to sign with a cosigner regardless of their credit history? Is it a good idea for landlords to stick their necks out on behalf of people they don’t know?
First of all, the landlord should meet with both the tenant and the cosigner. Explain exactly what cosigning entails, and obtain financial information from the cosigner as well as permission to run a credit and background check. If the cosigner’s credit or financial situation is no better than your tenant’s, then it really does defeat the purpose.
Next, obtain as much contact information from the cosigner as possible. If the tenant is not able to pay his or her rent a few months down the road, you must be able to get in touch with the cosigner to collect the rent. If you are unable to reach him or her, then you won’t have the rent either way.
I recommend having a separate cosigners’ form from the rental lease that explains – in detail – the duties of the cosigner in the event of nonpayment of rent from the tenant. This ensures that your liability interests are covered when and if a delinquency occurs. Further, the cosigner will be adequately aware of his or her duties when it comes to the tenant.
Sometimes, it is also best to limit who the cosigner can be, in relationship to the tenant. Many landlords require that a cosigner be a family member because this represents a stronger obligation to the tenant. If the cosigner is someone that doesn’t know the tenant very well, he or she will feel less responsible for his or her end of the bargain.
Multiple cosigners might also not be a bad idea. That way, the obligation for the tenant’s rent is spread out over more people, strengthening your chances of being paid in the event of a delinquency. Although this might require more paperwork and more hassle, the long-term benefits will outweigh the one-time stress.
And finally, there are other ways to protect your financial interests when it comes to poor-credit or low-income renters. You can implement a higher security deposit for those people, which allows them to prove that they can handle the responsibility of the rent. You can also require a percentage of the rent in advance, which will help to cover you in the event of trouble.