Should You Require A Lease Guarantor?

Total insurance premiums in 2017 reached nearly $1.2 trillion dollars. Suffice it to say, Americans like to reduce risk when it comes to their financial investments. Homes, cars, and even lives can be insured. But as landlords or property managers, other than your lease and an effective screening policy, there isn’t much to ensure your prospective tenant will treat your property with respect and pay their rent on time. How can you shield yourself from unexpected vacancies and misbehaving tenants? One solution is to add a lease guarantor to the rental application, who serves as an additional layer of insurance that rent and damages will be paid.

What Is a Guarantor on a Lease?

A lease guarantor is an individual who agrees to assume financial responsibility of a lease if the renter is not able to do it themselves.

A guarantor, also referred to as a sponsor or co-signer, vouches for the tenant in the event that they default on rent payments. A guarantor could be any person who is willing to accept these financial obligations – a family member, a friend or even a business associate. A company securing housing for its employee can also act as a guarantor.

For tenants who find it difficult to convince someone to be their sponsor, there are third-party companies available today that offer these services for a fee. These guarantor service providers help guarantee lease agreements for applicants. Most commonly, you’ll see parents and guardians act as guarantors in situations in which the risk associated with a young renter is high (as in student housing). In general, guarantors have steady income, good credit, low debt, and they meet or exceed the total monthly or annual income requirements.

Guarantor vs Co-Signer: What’s the Difference?

Although these terms are often used interchangeably, there is technically a subtle difference between a guarantor and a co-signer. According to Equifax, the difference lies in exactly how and when the person shares responsibility for the rent: a guarantor is only responsible for paying the rent when the resident defaults or fails to do so, while a co-signer is equally responsible for making sure the rent gets paid from day one. For instance, let’s say student renter Mike has rent due on Friday that he can’t pay. If Mike has a guarantor, his landlord can ask that person to pay the rent only after Mike fails to do so. If he has a co-signer, that person should have helped Mike with the rent immediately, before the due date, since they are both jointly responsible.

Why Might You Require a Rent Guarantor?

There are a number of reasons why a landlord or property management company may choose to require a lease guarantor before renting to a specific tenant. Perhaps their income does not meet your required threshold, or they recently started a new job. Maybe they are a student with a limited credit history and can’t provide a strong credit report or sufficient bank statements.

Whatever the context, a guarantor should co-sign when you as a landlord do not have absolute confidence that your tenant will be able to pay their rent.

A guarantor acts as a safety net, providing a sense of security to both tenant and landlord moving forward. In this way, the mere presence of a guarantor on a lease can help foster trust between tenant and landlord and improve the relationship as a whole.

Other common reasons you may choose to require a guarantor include a low credit score, a limited rental history, a history of unemployment, or the renter may be a foreign resident that has come to the US for work or study. Your desire for a guarantor may also depend on your location. In some large cities, like New York for example, it’s common for landlords to require that renters make many times the monthly rent amount. With already high rents, that can quickly turn into a pretty restrictive number. In this type of market, a guarantor is often a necessity.

Adding a Guarantor Agreement

To officially add guarantors for rent to your rental contracts, you’ll want a Guarantor Agreement. A Guarantor Agreement is a document that clearly states the responsibilities and obligations of the guarantor as they relate to the tenant and their lease. We recommend including contact information and a mailing address to which you as a landlord can send invoices for money owed, or any other necessary correspondence.

Typically, a Guarantor Agreement is appended to the end of a lease agreement as an addendum. If, for whatever reason, you need to add a guarantor to a lease that has already been signed, be sure to have all tenants sign the agreement as well as the guarantor. This will remove any ambiguity regarding the intent of the agreement.

Obligations of a Guarantor

The main obligation of a guarantor is to make rental payments if the tenant defaults. They might also be required to pay for any damages to the rental unit that exceed the amount covered by the security deposit. Damages are not always included in the Guarantor Agreement, so the extent of the obligation can vary from landlord to landlord.

Of course, in an ideal world, you will not ever have to call upon your tenant’s sponsor to fulfill their obligations. If non-payment of rent does occur, you as a landlord can send the bill to the guarantor directly. If you’re finding the guarantor difficult to work with, you can also rely on a collection agency. If the guarantor passes away before completing their obligation, the debts owed are bound to their estate.

Qualifying a Guarantor

As stated, the purpose of adding a guarantor to a lease is to offer additional assurance that a tenant will be able to fulfill their financial obligations. So of course, it’s critical that you ensure the guarantor is capable of fulfilling those obligations if called upon to do so. Just as you do with you tenants, you as a landlord should require a background check, credit check, and application from any guarantors. Set your rules and parameters for a guarantor just as you would for a potential renter.

Of note, some landlords require that the guarantor be located in the same state or city as the rental property. Today, it’s become easier to contact people across the country and transfer money, so it’s not as much a concern, but it is something to consider.

The Drawbacks of a Guarantor

You might think that there are no real drawbacks to requiring a guarantor for your renters, but there are a few:

• Extra Hassle and Expenses – Adding a guarantor means you have at least one additional person whose questions and inquiries you need to answer. You will also have to draw up more paperwork, perform additional credit checks, track more information, etc. All of this adds up to more time and typically more money.
• Uncertainty Still Exists – Nothing is certain in property management, and that goes for guarantors as well. Just as a good tenant can miss payments and turn into a nightmare, a guarantor can prove unable to fulfill their obligations.
• Limiting Your Tenant Pool – Your tenants may not always be able to find guarantors. If that’s the case, you’ll have to choose whether to risk it, or find another tenant.

Parental Sponsors for Students

Student housing in particular is a great fit for guarantor requirements and merits some extra attention. Students can be risky tenants. They have limited credit history if any at all. Few have a reliable source of income, and rarely can they meet typical income-to-rent requirements in their market. What’s more, they are not known for treating their housing with a great deal of respect. Guarantors can help ease the stress that comes with the uncertainty of collecting rent from student tenants.

Here’s another common scenario: A responsible and mature student wants to rent from you and can be trusted to pay rent on time every month, take care of the property, and respect all your rules. But you wouldn’t be able to tell any of that on paper. On paper, the student has low income and poor credit history due to the age of their accounts. Turning this tenant down would be a mistake, but you won’t know that until you start renting to them and realize their responsible habits. Adding a guarantor allows you to take calculated risks like these and end up with great tenants who simply needed some place to get started.

If you do decide to require guarantors for your student renters, consider requiring it for all of them. Sure, one sponsor will conceivably get the job done, but it can cause confusion. Let’s say, for example, that John and Robert live together but only John’s dad signs on as a sponsor. If Robert drops out of school and moves out of town, you can of course require that John’s dad cover his rental obligation. But he might put up a fight, claiming that he was only guaranteeing his own son’s portion. He’d be wrong, but you’re better off avoiding the dispute by requiring that all parties find a guarantor.

Alternatives

If you feel that requiring a guarantor is not the best fit for you and your properties, there are a few ways you can still secure your rental lease agreement and annual rent.  Increasing the property’s security deposit is an easy yet effective way to create a safety net. Most states have limitations on security deposits, so be sure to check your state laws before making that change. Of course, if you’re concerned that the tenant will be unable to pay their rent, they likely aren’t able to pay a particularly large security deposit.

Instead, you could consider increasing the tenant’s rental amount. In a best-case scenario, the tenant won’t run into any issues and you will benefit by collecting additional funds. If you decide to go this route, be sure to draw up an official policy and keep it on file. In it, stipulate how and why you apply this rental increase. Otherwise, you’ll open yourself up to a potential housing discrimination lawsuit.

Additionally, be sure to require that the tenant purchase a renters insurance policy. This may go without saying, but it’s especially true for prospective renters without a personal guarantor.

Finally, if you’re signing a lease with multiple renters, be sure to use the Joint and Several Liability Clause in your lease. This useful clause states that every tenant is responsible for the entirety of the lease, so if one renter fails in their obligation, you as a landlord can go after any of the others for the unpaid amount. In a way, this is like making each of your renters a guarantor for one another.

Deciding for Yourself

Ultimately, a guarantor is an incredibly useful tool for ensuring that your renters will be able to fulfill their leasing obligations. But like all tools, it’s not a perfect fit for every situation. Be sure to weigh the pros and cons of requiring a guarantor on your leases. And if you decide to use it, make sure you’re doing so properly.

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