Running credit and background checks are essential to reduce the risk of non-payment. However, sometimes requiring a cosigner to a lease is necessary to protect your investment. In this article, we’ll guide you through what a cosigner is, when to require a cosigner, and how to add a cosigner to a lease agreement.
1. What is a Cosigner?
A cosigner is someone who steps in to help an applicant who doesn’t financially qualify for a rental property on their own. When a cosigner signs the lease agreement, they legally accept the responsibility of paying rent if the tenant is unable to do so. This includes subleasing in some states. If a tenant subleases an apartment in New York, the cosigner agreement remains the same. Consider a cosigner as a welcomed teammate (for a tenant and landlord) to tag in and assist financially.
2. Who Can be a Cosigner?
A cosigner can be anyone over the age of 18 with adequate income and credit history to qualify for a rental property lease. Since cosigners are accountable for unpaid rent, most tenants choose family members. Requirements for a qualified cosigner will vary based on state laws; for example, cosigners in New York must have a credit score of at least 700, an annual income of up to 80 times the monthly rent, and live in the tri-state area.
In general, cosigner requirements often include:
- Established rental history
- High credit score
- Sufficient employment income
Alternatively, a tenant may use a cosigning company. The cosigning company will guarantee the lease for a fee even if the tenant’s income or credit history is not ideal. However, some companies only guarantee coverage of a specific portion of the lease, leaving the tenant on the hook for the remainder.
3. When Should a Cosigner be Required?
Most landlords have a tenant screening process to ensure they select the best possible tenant. But the following types of tenants may have a hard time getting approved without a cosigner.
Low Income: Landlords look for a good income-to-rent ratio to know tenants can afford the rental. Tenants usually need to make at least two and half times the monthly rent to be considered a good applicant.
Poor Credit: A credit score below 620 is considered low, while a score above 700 is considered excellent. Landlords might consider a cosigner for tenants with bad credit.
No Credit: Prospective tenants with zero credit could be unreliable because they don’t have a history of paying debts. Utilizing a cosigner can minimize the risk.
Eviction History: A tenant with a record of non-payment or breaches of a lease agreement is a red flag for landlords. To even consider renting, a responsible cosigner should also sign the lease.
No Rental History: If renting to students, landlords might face potential tenants with no rental history. Adding a cosigner to the lease to vouch for the tenant is a must.
4. How to Add a Cosigner to a Lease?
When adding a cosigner for an apartment, it’s highly recommended they sign an agreement. Making sure the terms and conditions are clear before leasing a property will avoid any misunderstandings later. Adding a cosigner is pretty straightforward with these steps:
- Do your research: Treat the apartment cosigner as an additional tenant. Have them fill out a rental application and run a credit check to ensure they’re financially fit.
- Check state laws: Create a lease agreement in accordance with the applicable state laws outlining the terms of the cosigner and their responsibility.
- Sign: Review the lease agreement with both parties before signing.
5. When to Consider a Cosigner?
Credit scores only show someone’s history – that’s it. If you’re renting to college students or someone who is self-employed, adding a cosigner can be a further risk reduction tool with some additional benefits like:
- Protecting your investment: Life happens, and even the best tenants can fall into financial hardship. Having a cosigner in place reduces a landlord’s risk of non-payment.
- Having more options: Not every tenant can meet the standard qualifications for a number of reasons; depending on the renter market, allowing a cosigner can significantly increase the number of applicants.
- Better than a higher security deposit: Some landlords opt to charge a higher security deposit for renters with bad credit instead of a cosigner, but this won’t make up for non-payment.
6. When to Deny a Cosigner?
Landlords aren’t legally obliged to accept a cosigner. If you move forward with a cosigner, the Fair Housing Act protects them the same way it does a tenant. They must be approved or denied without bias. Consider the following when deciding on an application that requires a cosigner:
- No Guarantee: Even with a cosigner, there is no guarantee the cosigner will pay if a tenant defaults on rent, which could mean additional work chasing down payments.
- Rules and Laws: Depending on the state laws, there may be rules for how landlords can pursue non-payment, and this includes recouping unpaid rent from a cosigner.
- Extra Admin: The option for a cosigner will undoubtedly draw more potential clients and more screening work for landlords.
A cosigner is someone who jointly signs a lease to guarantee payment. Allowing a cosigner on a lease agreement is an extra layer of protection for rental income. A cosigner on a lease takes financial responsibility for paying rent or other charges related to the property if the tenant fails to pay.
If a potential tenant does not meet the standard requirements during the rental screening process, consider adding a cosigner. A bad credit score, lack of steady employment history, or a first apartment rental are all examples of tenants who may require a cosigner.
Having a cosigner doesn’t automatically mean payment will be made if the tenant defaults, nor does it mean they will be the perfect tenant. There could be situations where you have to chase down both parties to collect rent. We recommend setting up online rent payments with automatic payment reminders to keep tenants on track.