Guide to Handling Cosigners + Pros & Cons
It's time to renew your leases, but you're getting more requests about whether or not a prospective tenant can use a cosigner. Should you allow them? Here's what to know about handling cosigners, the pros and cons, and how to proceed.
Understand Why the Tenant Needs a Cosigner
It's helpful to get clarity on why a tenant needs a cosigner in the first place to decide if it's right for your rental business.
Some renters have a low or nonexistent credit score, making it difficult to know how financially responsible they are. The renter may earn a high income, but it's still not an indicator of their financial history and whether or not they defaulted on credit cards or experienced other challenges.
In other situations, your renter may not meet the desired income requirement. If it's close to the required amount, you may feel it's okay to let them sign the lease anyway, especially if they have a high credit score and quality references. Of course, you take the risk of them not meeting their rental demands, and a cosigner could bring more peace of mind.
Even renters who seem financially responsible may fail a background check that ultimately reveals an arrest or eviction record. In some cases, the eviction may be at no fault of the renter, for example, if the bank repossessed the landlords' property. Whatever the reason, a cosigner can bring more security to a lease if the renter has a failed background check.
A lack of rental history is also a challenge for landlords and property owners. There's almost no way to know if the renter is reliable. Even good references from colleagues and supervisors aren't necessarily an indication of whether or not the renter will pay up on time. Instead, the addition of cosigners could make it easier for the landlord to move forward.
Screen the Consigner as You'd Screen the Tenant
If you decide to move forward with a cosigner, there is still some work to do. Landlords must screen the cosigner just like they would screen a new tenant.
1. Ask The Cosigner to Fill Out an Application
The first step to taking on a cosigner is requesting they fill out an application, just like the tenant.
Look Over Their Income Information
Just like a landlord would with a tenant, it's necessary to review a cosigner's income information, including pay stubs, if necessary.
There may be situations where a property manager can skip the income information of a cosigner. For example, if the renter has a high income but has a minor arrest on their record that shouldn't impact their rent or living situation, the landlord may want peace of mind the rent will be paid if anything similar happens.
Review their References
It's not unusual to ask tenants and cosigners for references. If the cosigner is taking on the responsibility of the rent, you want to make sure they are reliable and trustworthy. If possible, ask for references from their employer or colleagues.
2. Run a Background Check
Running a background check is essential if the tenant doesn’t pass their check. It won’t offer your rental business much protection if your cosigner also has multiple evictions or criminal history.
If you're new to pulling and understanding these reports, get the Guide to Renter's Background Checks.
3. Run a Credit Check
Running a credit check on a cosigner if the tenant doesn't pass their own check is essential. In some cases, a tenant may ask a friend with similar income to be their cosigner and assume the landlord won't check up on it. Play it safe and always check.
4. Interview The Cosigners (Optional)
It's a good idea to interview your cosigners and ensure they're a good fit for your lease. Learn what makes them great cosigners and what they bring to the table that the other tenant doesn't.
Here are a few questions to ask:
What is Your Relationship?
Parents, financially established relatives, or a trusted family friend with a large income base could all make good consigners. It's usually not a good idea if a tenant wants a friend or someone with a similar income and rental history to be their cosigner.
How Long Will They Be on the Lease?
There's no guarantee a cosigner wants to stay on the lease indefinitely. It's essential to understand their plans and how long they intend to remain on the lease. For example, if they've only agreed to cosign for one year with the tenant, you may need to find a new tenant when the lease expires.
Do They Plan to Access the Property?
Cosigners become part of the lease and can technically live on the premises, even though it’s not typical. This scenario could be a pro or con, depending on your rental business and the tenant involved. However, it could cause issues if the cosigner decides to move in at some point without being thoroughly vetted by a landlord.
What Is Their Financial Situation?
Gaining insight into a cosigner's financial situation is a standard requirement of landlords and property managers. Cosigners may have a high income, but that doesn't always mean there is stability. Ask if their income is from commissions, if they're self-employed, and more about their financial situation.
Pros and Cons of Having a Cosigner on the Lease
Before you make your decision about having a cosigner on the lease, there are some pros and cons to consider.
Here are some of the pros to allowing cosigners on your next lease.
Expands the Applicant Pool
Depending on your apartment or rental property’s location, finding quality tenants that are ready to sign may not be easy. Allowing cosigners on a lease expands the applicant pool and gives you more options to quickly fill your units.
Adds Extra Financial Security
Two incomes are better than one! When you have a cosigner on a lease, there's less at risk if one tenant doesn't have sufficient funds for rent.
Enjoy More Peace of Mind
There are times landlords end up with fantastic referrals for a tenant who doesn't quite qualify for the lease. In other cases, the landlord may want to do a favor for a family friend who appears reliable. Instead of taking a leap of faith, a cosigner offers peace of mind. You end up with a highly desirable tenant without the added worry of financial hiccups.
Despite all of the pros to having a cosigner on a lease, there are some cons to consider.
More Susceptible for Risk
At the end of the day, the tenant needed a cosigner for a specific reason. Whether it's poor credit history or a criminal record, you're taking on potential risk. The cosigner makes it less likely you'll go without rental payments if your renter doesn't pay up, but it's always possible.
It's tempting to think the renter will be more responsible and not want to burden their cosigner with picking up the rent. However, you can't ensure the renter will be financially accountable or perform their contractual obligations.
More Time and Resources Involved
A cosigner brings an added layer of security to a lease, but the process still requires more time and resources. Instead of vetting the tenant exclusively, the landlord also needs to run background checks and interview the cosigner. This situation may work well if you're struggling to find a quality applicant pool but may quickly feel burdensome if you have plenty to choose from.
Alternatives to Having a Cosigner on a Lease
If you're struggling to decide if a cosigner is right for your property rental business, there are some alternatives to consider. Depending on your state and local laws, landlords can sometimes charge a higher security deposit or more than the first and last month's rent. The additional financial security may eliminate the need for a cosigner.
A lease guarantor is another option for your rental business. Many cities and rental markets use the terms "guarantor" and "cosigner" interchangeably, but there are some key differences involved. For starters, guarantors guarantee the rent is paid but are not allowed to live on the premises.
A cosigner is also immediately responsible for paying rent when a tenant is. However, a guarantor pays rent when an event is triggered, such as a tenant failing to pay rent or suddenly moving out.
A cosigner could be a good fit for your rental business, provided you're weighing the pros and cons. The good news is, it doesn't have to be all or nothing. You can incorporate cosigners into your leases as warranted and then opt not to allow them on future renewals if needed. Whatever you decide, make sure your rental business is protected, and you have reliable renters or cosigners on your next lease.
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