What Is A Co-signer On A Lease And When Should You Add One?

The Big Picture On Co-Signers In Lease Agreements:

• • A cosigner on a lease takes on the legal responsibility for paying rent if the tenant fails to do so.
  • Cosigners benefit landlords by expanding the pool of potential tenants, especially in high-demand markets like college towns.
  • If not handled properly, cosigner agreements can pose risks, including added administrative costs, potential tenant misbehavior, and complex collection processes.

The Dilemma in Real Estate Leasing

“I’m sorry, but you need a regular income and a good credit rating to lease one of our apartments,” Mary Keller explained to the anxious 20-year-old student eager to lease a one-bedroom unit in the popular Harlan House Apartments near the University of Arkansas.

The young coed, shaking her head to emphasize her disappointment, exclaims, “But I have my own bank account, and my parents send me money every month. I promise that I will pay the rent on time.”

According to a TransUnion poll, rent payment problems are the number one concern of real estate property owners. From experience, they know renting an apartment to someone with a sketchy, limited, or no credit history often leads to payment problems.

Of course, college students are not the only potential tenants with dubious financial credentials. Credit reporting agencies estimate that 30% of Americans have credit scores below 600, which is considered a “poor” or “bad” credit risk. Most are renters, unable to buy homes.

How to treat prospective tenants with poor credit is a dilemma for most rental property owners. Restricting leases to those with high incomes and excellent credit scores will likely extend vacancy rates and lower rental income. On the other hand, no landlord wants to chase deadbeats or professional tenants for the rent and suffer through the eviction process. Trying to collect debts from an ex-tenant with little assets of value or an irregular minimum income is expensive and frustrating.

Fortunately, an alternative to rejecting a tenant outright is securing a co-signer on the lease.

What Is a Co-Signer for a Lease?

A co-signer on a lease agreement assumes the same legal responsibilities as the tenant who signs the lease and will live in the rented property. If the lessee (tenant) fails to pay the rent, the landlord can require the co-signer to pay, including specified penalties and fees. Also, co-signers are typically responsible for any damage caused by the tenant or touch-ups if included in the co-signed rental contract.

Individual states have different laws regarding lease and co-signer agreements, including conditions and procedures that require payment by the co-signer. Failure to follow the prescribed process may render the co-signer agreement void or limit its associated damages. Since non-compliance penalties can be severe, landlords should always check the terms of their proffered lease agreement and associated documents with an attorney.

Co-signer vs. Guarantor: What’s the Difference?

Non-specialists typically use the term interchangeably, but they may not be the same in practice depending on the relevant state law:

• • Co-signers. If a person co-signs a real estate lease, they and the lessee are jointly and separately responsible for the performance of the contract terms. In the event of a default, the landlord can require either or both to cure the default. Practically speaking, the landlord will pursue collection from the party most capable of payment.
  • Guarantors. Depending on state law, a guarantor may not be a party to the lease itself but guarantees the performance of a lessee to comply with the rental agreement. Legally, a guarantor has a contingent liability, not the direct obligation of a co-signer. In other words, the guarantee contract may require the landlord to legally declare the lessee in default before they can pursue the guarantor for payment. Consequently, collecting from a guarantor may be more expensive and time-consuming than a co-signer.

Understanding Co-signers and Guarantors in Lease Agreements

Here’s a quick general comparison between the two for a better picture.

Be sure you understand the difference between a co-signer vs. a guarantor for a lease – if any – in your state. Always use the lease contract that provides the maximum leeway and least expense to collect your delinquent rent.

Does the Law Ever Require the Use of Co-Signer Agreements?

No, a landlord is not legally required to offer potential renters an option to add a lease co-signer when the applicant does not meet the landlord’s credit requirements.

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When Should a Co-Signer be Required?

A co-signer in a lease agreement helps landlords mitigate risk when evaluating certain rental applicants. However, it’s not a one-size-fits-all solution — it’s only typically recommended in certain circumstances. 

1. Income shortfall: If the applicant’s gross monthly income does not meet the standard 2.5 to 3 times the monthly rent threshold.
2. Credit score concerns: When the prospective tenant’s credit score falls below 620, as it could indicate an unreliable payment history.
3. Lack of credit history: Assessing the financial responsibility of applicants who have not yet established a credit profile can be challenging. 
4. Previous evictions: When an applicant’s rental history includes lease violations or evictions, which also signals increased risk for property owners.
5. First-time renters: In cases of first-time renters, such as recent graduates or young professionals, who cannot provide a track record of responsible tenancy.
6. Recent financial setbacks: If the applicant has undergone significant life changes affecting their financial stability, such as job transitions, divorce, or medical events.

Then again, be sure to follow state laws before implementing such requirements, as you may encounter professional tenants who take advantage of regulations that protect tenants from landlord discrimination.

Should You Consider Requiring a Lease Co-Signer?

Property managers and owners must know the benefits and risks of requiring co-signers on a lease agreement. Properly employed, they can boost occupancy rates and reduce the financial costs of delinquent tenants. Conversely, careless or improper use of the strategy can increase costs and headaches for owners.

Benefits of a Co-Signer Program

Rental property owners use co-signer agreements to:

• • Expand the number of potential tenants. In some cases, allowing lease co-signers may be practically necessary. Landlords with property in a college town who cater to students often use co-signers since young applicants with minimal credit histories make tenant screening tools.
  • Gain a competitive advantage. In competitive markets, some landlords may target tenants that others consider “high risk” to maintain high occupancy rates and rents. Recent immigrants to the U.S., illegal immigrants, and those with criminal records typically lack extensive credit or residential histories. A creditable co-signer, whether an individual or organization, indicates that a prospective tenant has a support system that will encourage the renter’s compliance with the lease terms.
  • Reduce financial risk. Using a co-signer transfers the risk of rental delinquencies from the property owner to the co-signer on the lease. Even some Section 8 housing property owners require co-signers for the portion of rent not covered by the government program. Of course, the effectiveness of a co-signer strategy depends on the financial capability of the potential guarantor and the landlord’s ability to enforce the co-signer agreement.

Yet, despite the real benefits of a co-signer strategy, they shouldn’t be used to justify signing a lease with a fundamentally irresponsible tenant. Using a co-signer on a lease agreement is not a cure-all and has limitations.

Limitations of Lease Co-Signer Programs

Having a co-signer on an apartment lease is one way to reduce the financial risk of delinquent rents, but not without risks for the real estate owner. Impulsive or careless use of a third-party guarantee can create more complicated collection efforts and expose landlords to lawsuits and financial penalties.

Before adopting a co-signer program, consider the following risks:

• • Tenant behavior. A co-signer can reduce the financial risks of leasing to a questionable tenant but will not protect a landlord from noise complaints, property damage, or aggressive or inappropriate actions.
  • Additional costs and inconvenience. An effective co-signer strategy is much more than getting a second signature on a lease agreement. Landlords could incur legal and administrative expenses to develop the legal documents and train employees. Verifying the guarantor’s details requires the same tenant screening reports and other efforts as screening the lease applicant.
  • Poor screening. Merely adding a third party to a contract is no performance guarantee, especially if the co-signer can’t or won’t comply with the terms. Landlords should vet co-signers as thoroughly as lessees. A strong credit history indicates that co-signers must have sufficient income, assets, and willingness to cover rent defaults.
  • Inadequate agreements. Remember that few co-signers are happy or eager to meet an unexpected, indirect obligation and will pursue every opportunity to delay or escape payment. Ensure that your lease co-signer agreement meets your state’s legal standard before its use to avoid unpleasant surprises when trying to collect from the guarantor.
  • Collection process errors. Due to past issues, states have established strict processes for pursuing unpaid rent. Failing to follow these can void collection attempts and risk legal consequences. Landlords must implement and clearly communicate specific collection procedures.

Making Sure Landlords Know What They’re Getting Into

Landlords should ensure that a prospective co-signer or guarantor fully understands and agrees to:

• • the obligations that they are assuming,
  • the high probability that they may be called upon to make delinquent payments and
  • the process by which the landlord will pursue collections.

Some attorneys recommend language in which a co-signer explicitly relinquishes the right to protest or otherwise delay payments to the landlord. Ideally, these details will be prominently displayed or referred to in the co-signer agreement. It’s always better to be safe than sorry!

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How to Add a Co-Signer to a Lease

Suppose you decided to add a co-signer; you’d need to communicate the responsibilities they are taking over clearly. You’d have to be as clear as possible to both the potential renter and the co-signer to avoid misunderstandings down the line.

Below are steps you can apply to add a co-signer to the lease agreement.

1. Explain to the renter why a co-signer is needed and their responsibilities.
2. Have the co-signer complete a rental application and undergo a screening process like the renter. 
3. Create a co-signer lease agreement that clearly outlines:
   • • The co-signer’s responsibilities
     • Terms of the agreement
     • Payment expectations
4. Add the co-signer to the existing lease or create a new lease that includes all parties.
5. Make sure that everyone involved — tenant, co-signer, and landlord — signs the updated lease agreement.
6. Provide copies of the signed agreement to all involved parties.
7. Set up a rent collection system that accommodates the new arrangement (you can do this with our landlord app!).

Take note: follow local laws and Fair Housing regulations throughout this process.

The Importance of Screening Tenants

In a perfect world, rental tenants would be sterling credit risks, outstanding citizens, and long-term residents who never object to rent increases. Unfortunately, rental applicants often fail to fit that description in the real world. This is precisely why screening tenants remains arguably the single most important task that landlords undertake.

Proper rental screening processes include:

• • Reviewing of the rental application. Your rental application should document demographic details (name, age, a legal identifier such as a Social Security number, permanent address, phone number, and email address), employment history for at least ten years, including income, and references.
  • Applicant’s authorization to perform a record search. The rental application should contain language to allow the property owner to conduct multiple data searches while also summarizing the prospect’s rights under the Fair Credit Reporting Act (FCRA). Landlords can charge a non-refundable application fee in most states but must have written authorization from the candidate before doing any search. (Hint: You can include tenant screening reports with our rental application and charge them directly to the applicant. Just sayin’.)
  • Background checks. Landlords should verify all employer references. You should also obtain credit histories and execute confidential searches of relevant court records, such as landlord/tenant disputes, criminal records, and sex offender status.
  • Housing history verification. As part of the tenant screening process, call current and former landlords and verify that they’ve paid their rent on time every month of their tenancy.

Despite their frequent use, lease co-signer agreements are not a substitute for thorough tenant screening. Since a co-signer or guarantor is subject to the same obligations as the tenant, they should be subject to the same screening process. A co-signer who cannot pass the lessor’s requirements eliminates little payment risk.

Other Ways to Protect Yourself as a Landlord

Wearing suspenders in addition to a belt seems like overkill until your belt breaks. Using lease co-signers is a popular strategy to reduce rental payment risks, but it’s not the only one.

One relatively recent option for landlords is buying rent default insurance. For a few hundred dollars a year (typically $300-450), landlords can sleep at night knowing that if their tenant defaults on rent, the insurance kicks in and starts paying it until they’ve gone through the eviction process and signed a lease with a new tenant. Check out Steady if you’re new to the idea of rent default insurance to get a free rate quote.

Security deposits offer another form of protection. Landlords can usually keep the security deposit if the tenant fails to pay rent or damages the rental unit.

However, strategies like co-signers and security deposits are not foolproof. Landlords always make security deposit mistakes, many of which can render the deposit forfeit. State laws may limit the availability of security deposits to specific amounts or circumstances. Failure to properly administer a security deposit account can erupt into administrative nightmares.

Many tenants also perform better if they feel that they have a stake in the property and must pay rent on time to keep that stake. Landlords can offer a rent-to-own program or option to purchase as another incentive to keep tenants performing in line with the lease contract.

Final Thoughts

Electing to accept co-signers or requiring security deposits may reduce your risk of future delinquent payments. However, you must apply the same treatment to all prospective tenants in a similar condition. Federal and state fair housing laws prohibit discrimination for certain protected classes of people based on race, religion, national origin, familial status, age, disability, or gender. For example, Landlords must treat single mothers with low income the same as single men with the same income.

Rather than rent to applicants with questionable financial histories, many landlords counter the risk of lower occupancy rates with aggressive rental marketing campaigns and tenant retention programs. Will such strategies be more successful than the use of co-signers? It depends because each property varies by location, offers different amenities, and appeals to a different market demographic. Real estate investors have different financial goals, capabilities, and risk tolerance. Each investor must make the decisions that best fit their circumstances and are most likely to be successful.

Do you accept lease co-signers for applicants with poor or no credit history? How has it worked out for you? Does the reduced financial risk justify the additional administration?

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