For many people, obstacles can arise during the rental application process for a variety of issues. If someone has never rented independently before - or lacks a strong credit history - a landlord may be reluctant to execute a lease.
However, prospective tenants may still have options! If the landlord is agreeable, tenants have the option to add a co-signer to the lease.
What's a co-signer?
A co-signer guarantees the tenant's financial responsibilities, including rent and potential damages. Given the need, the co-signer typically has a much stronger credit history and stable history.
For example, a tenant may need a co-signer in the following scenarios:
- Angela is a college student. She has a part-time job working at a bookstore but only has a debit card. She wants to live away from campus but her income is not sufficient to apply for the apartment. Angela can apply for the apartment with one of her parents as a co-signer, so long as they meet the established income requirements for the property.
- George works at a hardware store. Last year, he injured himself at work. While he was recovering, he missed a few credit card payments. As a result, he has a low credit score. While he's continued to make payments on time, his credit score is too low for the landlord's set criteria. Sam, George's best friend, understands his situation and wants to help. Sam has an excellent credit score and has no plans to move during the period of George's initial lease. Sam and George talk to the landlord who agrees to accept a joint application with George as the tenant and Sam as the co-signer.
- Tyler was living with his parents during college and his first few years in the workforce. It is really expensive to rent an apartment in his hometown so Tyler was able to save a lot of money by avoiding extra housing costs. At work, Tyler is eligible for a promotion but they would have to move to a new town. Tyler really wants the job but he has an insufficient credit history to support his rental application. Tyler's friend at work decides to help Tyler with the rental application.
- Sam and Trudy decide to be roommates. Trudy is unable to meet the landlord's criteria as a tenant so Trudy's grandfather agrees to be a co-signer on the lease. Sam and Trudy have been friends for over 20 years so decide not to have any formal written agreement as roommates. After a few weeks as roommates, Sam decides that he wants to back out and moves all of his belongings out of the house. Trudy is stressed, facing a one year lease alone. Then, Trudy realizes that his grandfather is also liable for the unpaid rent if Sam refuses to pay. Bottom line - as a cosigner - Trudy's grandfather has accepted joint and severable liability for the entire lease, not just the portion relating to Trudy.
Risks & Rewards for Co-signers
Despite good intentions all around, the prospective tenant and co-signer need to understand the serious responsibility and risk involved. If a tenant fails to pay rent on time, the landlord can sue both the tenant and the co-signer. Even if the co-signer never lives in the property - or even lives in another state - the landlord can hold the co-signer accountable for unpaid rent.
In many cases, the parties may assume that the co-signer is only required for the first year of the lease. In my experience, however, it is very important to clarify whether the co-signer will remain on the lease if it renews automatically. To prevent any misunderstanding, the co-signer should send a written notice to the landlord -- prior to the expiration of the lease term -- if the co-signer wants to remove themself from future leases.
On the other hand, tenants should also be aware that a co-signer enjoys all the same rights and responsibilities as the other tenants. A co-signer's name is on the lease; therefore, they have a legal right to the space. At the same time, the landlord has the ability to hold the co-signer just as responsible for rent payments as the actual tenants.
Based on my experience, the co-signers want to accept this responsibility in order to ensure the tenant can secure a lease. Yet, it is important for the co-signer to be aware of their assumption of all the risks under the lease - which can even affect their own credit score as far as debt-to-income ratio. A co-signer could also be impacted if the tenants pay rent late and the landlord subsequently reports these late payments to any credit agency.
Of course, there are also the credit checks involved -- numerous credit checks can impact a credit score so co-signers should take into consideration whether these credit checks will impact any of their own planning or purchases.
Other options?
If a tenant is unable to secure a co-signer, there may be other options available if the landlord is willing to agree. For example, the tenant could offer to pay a larger security deposit. While few tenants would prefer this option, the tenants could offer to pay more rent - at least for the initial term of the lease - while they continue to address whatever concern the landlord may have.
Separately, there is also the option for a tenant to secure a guarantor. A guarantor is different than a co-signer. The guarantor makes a financial commitment to pay rent if the tenant fails to meet their obligations. However, unlike a co-signer, the guarantor is not a party to the lease -- and, therefore, does not have any rights to enter the property.
At the end of the day, my experience suggests that a co-signer can have a huge intangible benefit - the opportunity to support someone secure housing! With adequate communication and clear terms, these arrangements can be targeted and temporary. As long as there is clear understanding among all the parties, especially if there are multiple tenants/roommates involved, a co-signer can provide much-needed support for a friend or loved one seeking a new home and trying to build better credit.
