When Should a Landlord Require a Lease Guarantor?

It’s no secret that being a landlord can be trying.  When you have a vacancy and the prospects are few and far between, you must evaluate the applicants in front of you.  We stand firm that a landlord should never depend on their gut or emotions when deciding on whether to rent to an applicant or not.  But when the best applicant you have doesn’t qualify, then what is a landlord to do?  That landlord should require a lease guarantor.

What is a lease guarantor or cosigner, and when would you require one?

A guarantor does not reside in the rental but legally agrees to guarantee the tenant will follow all terms of the lease.  Primarily this is used for income purposes, but a guarantor also is financially responsible for the condition, and any damages that may occur should the tenant violate the lease.

Typically, a landlord would require additional protection or a lease guarantor when an applicant cannot qualify on their own.  This situation is common for those who do not have a good credit history or have never rented before.  We find this often with younger tenants who are moving out on their own for the first time.  It is common practice for parents to co-sign or guarantee a lease for a college student, as we have several times with our boys.

It is important to note that the applicant must have adequate proof of income, positive personal referrals (yes, we check those for every applicant), and a solid reason for wanting to move to the area of your rental.  For example, new employment or moving back near family after living away at school are valid reasons.

How Does a Lease Guarantee Work?

Just as you do the applicant, you would also vet the guarantor.  For example, a landlord scrutinizes the guarantor just as they would any applicant.

Most applications have a dual purpose for either the applicant or the cosigner.  First, require the guarantor to fill out and sign the application, pay an application fee, and do a full background check.  Look to make sure they have a stable income, own their home or property (in the same country as the rental), have a very clean and positive credit report, and have positive references.

The keyword here is stable.  The income the guarantor generates would need to be enough to cover the rent should the tenant stop paying.  We require 2 X’s rent over and above their personal expenses.  So, Grandma with only $1500 in social security as her only income, would not be considered a safe bet as a guarantor.

Why Does the Guarantor Need to Own Their Own Home?

Again, it comes down to stability.  A person who owns their own home is much easier to locate should you need to.  It is common for renters to move often, so should you need to seek financial retribution for damages that exceed the security deposit, you will want to see they have lived in the same home for several years.  It is challenging to collect on damages or lost rent from a resident who lives in another country.  Avoid that situation at all costs.

Confirm With the Guarantor They Understand What They Are Signing

Just as you would take the time to go over the lease in detail with a new tenant, before allowing a guarantor to sign, it is essential to have a conversation with the guarantor that they understand precisely what they are signing on for.  Many parents will sign away, and then when their child hosts a raging party and destroys the property, they are shocked when they get the repair bill.   Be stern so that this person understands the seriousness of this commitment.

If possible, Get an Additional Deposit

It is essential to require an additional deposit on top of the tenant’s security deposit.  This retainer shows that the guarantor has a significant stake in the lease if damages or lost rent exceed the security deposit.   Also, make sure you know the max security deposit you can require for your county or state.

In California, we can only charge up to two times rent for ALL deposits (unfurnished units).  This ordinance means that if rent is $1500, we can collect up to $3000 total deposits.  All deposits, you ask?  Yes, often, we will charge a little bit of a higher security deposit for a tenant who needs a guarantee.  So, say that is $2000.  If the tenant also has a pet, we will charge an “additional deposit” (never call it pet deposit) for $500.  The remaining allowed only leaves $500 to be collected from the guarantor.

Please read our blog, Security Deposits: 5 Tips Landlords Should Know, for more information on security deposits.

How Long Is the Guarantee For?

The length of a guarantee depends on how long the tenant signs a lease.  Commonly, for a lease term or first year if only month to month.  After one year, re-evaluate the following:

• Tenant’s income
• If rent has been paid on time each month
• Look at the inspection reports to see how they care for the property.

If you are satisfied that they can fulfill the lease terms independently, then renew them without the guarantor.

We have only had to require a guarantor one time.  The young man was fresh out of college and lived in student housing his whole time away at college, so he didn’t have any landlord references.    His credit score was acceptable, but he didn’t have any solid credit history.   His income was close to our requirement, so we asked if he could secure a guarantor.   He asked his grandmother, who tentatively agreed.

This tenant paid rent on time every month, and when his year was up, per our policy, we vetted his income and credit again.  Everything looked great, so we released the guarantor.  Within two months, he stopped paying rent on time.  We racked in additional income in late fees, but he just rarely paid on time.  He was served three-day pay or quit notices and always got the rent to us the last day before we could take the next step.  We followed policy, and it still came back to bite us.    As with anything in life, some things don’t go right, no matter how adequately prepared you are.

Here’s to creating one more policy for your rental property business!  Knowing when you, as a landlord, should require a lease guarantor is an important policy to have in place.  Set your applicant criteria and state precisely the minimum requirements to request a cosigner.   This written policy should be in a binder or an online document available to ANY applicant.  It’s another way to cover your ass-ets and ensure no discrimination is going on.

Happy landlording!