Co-Signers & Guarantors
Co-Signers & Guarantors
Based upon a greater perceived risk, you may offer conditional acceptance to an applicant by requiring the applicant to provide a co-signer or guarantor. The terms co-signer and guarantor are often used interchangeably and they can mean the same thing. However, there can be a significant difference between a co-signer and a guarantor if the co-signer becomes a co-tenant due to the manner in which the agreement is constructed. We will further discuss this potential problem below and for simplicity will hereafter use the term co-signer from now on, as that is probably the term most often used by residential landlords.
Approval of the applicant as your new tenant is contingent upon the co-signer being financially qualified and fully screened. If the potential co-signer cannot successfully qualify, his guarantee is worthless, and your offer can be withdrawn since the contingency was not met.
The conditional offer, depending on the source of the information used to condition the acceptance, may or may not require notification to the applicant of his rights under the federal Fair Credit Reporting Act (FCRA).
The notification, an “adverse action” letter, is a mandatory disclosure of an action taken that is unfavorable to the interests of the rental applicant; that is, creates a burden in order for the applicant to be approved. The subjects of adverse action and FCRA requirements have been discussed in previous tenant screening articles.
Common adverse actions by landlords include:
- Requiring a co-signer on the lease;
- Requiring a deposit that would not be required for another applicant;
- Requiring a deposit larger than might be required for another applicant;
- Raising the rent to a higher amount than for another applicant; and
- Denying the application.
If your conditional offer was based in whole or in part on any information contained in a consumer report, you must send the applicant an adverse action letter. You must send an adverse action letter even if other factors influenced your decision.
If you offered conditional acceptance based upon information personally supplied by the applicant, such as the rental application, a personal request from the applicant to provide a co-signer, or during conversions held with the applicant, you do not need to send an adverse action letter.
The applicant should be made aware that the potential co-signer will need to complete a rental application, pay any applicable processing fees, and submit to your regular tenant screening procedures. In short, you will evaluate the co-signer as thoroughly as you did the applicant. Character, capacity, and credit are the areas of interest as you conduct screening.
In particular, you want to determine that the co-signer can take on additional financial obligations. This is important since the co-signer will be responsible for not only his own housing costs but also the tenant’s rent in case of default, and, perhaps, damages by the tenant. Does the co-signer have enough liquid resources to cover the tenant’s rent or other financial obligations for some period of time? If the tenant skips out, will the co-signer be able to pay as agreed – both the rent until a replacement tenant is found and any damages?
You will need to deduct the co-signer’s housing costs from his gross income before comparing that income amount to your income standards. For example, if the co-signer has a gross monthly income of $4,000 and mortgage costs of $1,000, then his adjusted gross monthly income is $3,000. Accordingly, if you use a 3:1 income to rent ratio, the tenant’s rent cannot exceed $1,000 if the co-signer is to qualify under your terms.
As mentioned earlier, absent adequate language in the lease, a co-signer can be considered the same as a signer regarding the lease agreement. Accordingly, the co-signer can become a co-tenant who, even though not living in or doing business in the leased premises, has all the same rights as a co-tenant who resides in the subject unit.
A guarantor is someone who assumes certain financial liabilities for a lease, but does not actually sign the lease agreement and, accordingly, has no rights to the premises. Accordingly, the landlord usually wants the co-signer to legally be considered a guarantor. There are basically two different types of guarantees, broad and narrow. The broad form of guaranty makes the co-signer/guarantor liable for all financial matters including rents and damages. The narrow form limits the liability to the rent.
Whatever the title of the agreement, it is important that the language makes it clear that the co-signer or guarantor is only guaranteeing all financial aspects of the tenant’s lease and is not occupying the premises pursuant to the lease and that the co-signer or guarantor does not become a tenant.
If the co-signer agreement is not contained within the lease agreement or signed concurrently with the lease agreement, the lease agreement should contain a clause that the lease is contingent on receipt of the signed co-signer agreement. The co-signer should receive a copy of the signed landlord-tenant lease agreement as well as of any separate co-signer document.
If a co-signer does not sign the lease agreement in person (e.g., the out-of-state parent of a college student) it is very important that, in addition to providing copies of the same identity verification documents that should be required of the applicant, the co-signer’s signature be notarized in order to minimize the possibility of forgery.
Guaranty agreements can be written to cover only an initial lease term or to include future extensions and renewals. The agreement should include any assignee of the lease during the term of the original guaranty. If a lease is modified during the guaranty period, all parties, the co-signer/guarantor and the tenant, should be required to sign a new document related to the modified lease.
In community property states landlords should require that both husband and wife execute a co-signer or guaranty agreement in order to be certain of binding the community. For the same reasons, both husband and wife tenants should be required to sign lease agreements. It is best to have both signatures whether or not this is an issue in a particular state because it eliminates potential disputes regarding liability for a lease and any issues regarding the fine print in the statures. The same recommendation applies whether the co-signer or guarantor is guaranteeing a commercial lease for a limited liability entity or parents are guaranteeing a residential lease for a student child.
Having a formal, written co-signer agreement emphasizes the legal obligations of both co-signer and tenant and what the consequences will be if the tenant defaults. Language in the co-signer agreement should make it clear that:
- The co-signer is jointly and severally responsible with the tenant for any and all financial obligations of the tenant under the lease agreement including but not limited to rent, deposits, fees, or other charges as a result of damage to the unit.
- The co-signer acknowledges that the landlord has no obligation to give notice to the co-signer if tenant defaults.
- The co-signer agrees to appoint the tenant as the co-signer’s agent for service of process in the event of any lawsuit that might arise from the agreement, releasing the landlord from any obligation to separately serve
the co-signer directly. - The co-signer acknowledges the landlord may demand that the co-signer perform per the co-signer agreement in the event of tenant default without first using any of tenant’s security or other deposits.
- The co-signer shall remain liable for the performance of an assignee or sublessee of the tenant unless expressly relieved by written termination of this condition by the landlord.
- The prevailing party of any legal action brought by either party to enforce any part of the agreement will recover reasonable attorney fees, court costs, and other expenses associated with collection of a judgment.
While it can provide a means to fill vacancies, particularly in tight markets or college towns, many landlords feel because of the additional time, effort, and costs to screen co-signers and coordinate the lease/co-signer agreement process, the practice of accepting co-signers is of little real value. As a practical matter then, a landlord can legally set his rental policies to refuse to consider co-signers with one exception.
If a disabled applicant with insufficient income but who is otherwise qualified under the landlord’s standards, asks the landlord to accept a co-signer to guarantee rent if need be, the landlord must make an exception to his rental policy and conduct screening on the proposed co-signer. If the co-signer qualifies under the criteria previously discussed, the landlord must accommodate the applicant’s request and accept the co-signer.