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.
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.
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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:
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.
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.
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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:
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:
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:
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.
Who needs a cosigner in real estate?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.
Are there risks to having 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.
Saad started his career as a Certified Public Accountant (CPA) working for a top-tier accounting firm. He was responsible for helping audit alternative investment funds. He later worked at a hedge fund where he was responsible for preparing financial statements and implementing new technology. He also ran a successful private tax practice for five years. After completing his MBA at Duke, Saad joined The Boston Consulting Group to do management consulting. At BCG his experience spanned several industries and growth projects across Pharma, Retail, and Technology companies. His passion for democratizing finances led him to Plaid, a fintech, where he worked with large Banks and Financial Institutions to make finances and money easier for all.
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