Lease Guarantors vs. Co-signers: What Should You Require?

You have an empty apartment or rental property and are ready to find your dream tenant. What happens if they don't meet your rental requirements or are new to renting with no previous references? A guarantor or co-signer could be the answer for your rental business.

What is a Lease Guarantor?

A guarantor is an individual who legally takes on the financial responsibility of the rent if your tenant doesn't pay. Guarantors on a lease are usually a parent or relative of the tenant, though anyone willing to take on the financial liability.

What is a Co-signer

A co-signer is similar to a guarantor, and many people use the terms interchangeably. The co-signer for a lease is essentially a roommate. They also take on the legal responsibility for taking on any unpaid rent if the tenant fails to pay for their share.

Differences Between Guarantors and Co-signers

Despite the similarities between guarantors and co-signers, there are some key differences. The co-signer signs the lease with the tenant and can also occupy the unit. Just like a guarantor, co-signers are usually a family member or significant other but could be anyone willing to help pay rent and fees.

Guarantors are not tenants and are not allowed to occupy the apartment.

When Should a Co-signer or Guarantor Be Required?

Ideally, landlords should never have to worry about their tenants making rent. However, there are times a guarantor or co-signer is essential to protecting your rental business and getting peace of mind. Here are a few reasons to require either a co-signer or a guarantor:

• Renters with poor credit or no credit
• Have an eviction on their record or suspicious activity on their background check
• Lack of rental history
• New to the workforce and don't have multiple bank statements or work history
• Can't provide landlord or professional references
• Don't meet requirements, like earning three times the rent

Some rental markets are more financially demanding than others. For example, New York City, San Francisco, and Boston are notoriously expensive rental markets. If you own a rental property in a neighborhood full of college students who aren't working full-time yet, you will likely need to allow guarantors or co-signers to find an ideal tenant.

What Are the Requirements for Guarantors and Co-signers?

Guarantors and co-signers are not the same as traditional tenants and may need to meet stringent requirements than the lease signers. In high-priced rental markets like New York City, guarantors are often required to earn up to 100 times the monthly rent to qualify.

Landlords can look at their local regulations and market trends to determine how to approach guarantors and co-signers. However, the landlord should clarify and document what is required and what a guarantor or co-signer is. Not all tenants are familiar with the terms of financial responsibility. For example, a renter who has their Aunt sign on as a co-signer may not realize she is now legally permitted to live on the premises.

Are There Any Downsides to Having Co-signers or Guarantors on a Lease?

Co-signers and guarantors offer ample financial protection, but there's more to it than collecting missed rent. Despite all of the pros to having a co-signer or guarantor on your next lease, there are downsides to consider.

Landlords need to run a credit report and background check for a co-signer who will be living on the premises. Landlords also need to require bank statements and the same financial statements required of a tenant. Although you can charge a fee for these reports, it adds another layer of administrative work and research to fill the unit.

If your tenant fails to meet their financial obligation for rent, you will need to contact the co-signer or guarantor to request payment. They are legally required to pay up as outlined in your lease, but that doesn't mean there may not be issues collecting on the rent through a third party.

Should You Favor Tenants Who Don't Need Co-signers and Guarantors?

Landlords have the right to pick and choose their tenants based on qualifications. You can legally decline a tenant who requires a co-signer or guarantor and choose one applicant over another. However, check that the reasons you are declining the tenant are compliant with fair housing laws. For example, you cannot reject a tenant based on a protected class like race or gender.

Taking on a co-signer or guarantor may be well worth the effort. Landlords can comfortably charge market value in a down economy or above the average rental price in competitive neighborhoods and rest easy knowing their rent will be paid.

Are There Any Alternative Options to Co-signers and Guarantors?

Yes! If you prefer not to use a co-signer or guarantor, there are a few options you can consider. Depending on your state and local laws, you may be able to charge more for a security deposit. The additional charge offers added security if the tenant doesn't pay their rent. Some states have no limit on how much you can collect, while others may only allow one month's rent.

You may be able to charge more than the first and last month's rent to protect yourself from any rent gaps. Again, check your local laws and regulations to make sure you're compliant.

You may avoid the need for a guarantor by switching to a month-to-month lease arrangement. These leases renew automatically unless the agreed-upon notice is given. Security deposits can also be collected on a month-to-month lease, giving landlords added protection against tenants who don't pay.

Final Thoughts

A co-signer or guarantor may add another layer of work and headaches to the rental process, but they also offer peace of mind and allow exemplary tenants with a lack of credit history or new to the workforce to apply. Weigh what's the most important to you in your rental business to find the best situation for your next apartment lease.