Sometimes tenants need a little help to qualify for a lease – and there are many valid reasons for that. An applicant with bad credit could have been married to a big spender who ruined their credit, when alone they may have exemplary money management skills. Young adults venturing out to find their first home won’t have any credit despite a steady income and willingness to pay their rent.
An applicant with bad credit or no credit isn’t necessarily a red flag. Landlords can find good tenants from this underserved portion of the applicant pool by asking for a cosigner on the lease. This is an entirely personal preference – there is no law requiring landlords to agree to a cosigner. Many believe it’s a great idea that makes available a whole new world of tenants. Others consider the process too risky and don’t allow it at all.
It all boils down to what’s best for your property, so it’s worth doing a little homework. This guide will provide all the necessary information you need to screen, process, and add a cosigner to a lease.
A cosigner is someone who adds their good credit as a backup for someone with a lower credit score. Cosigning is used in all sorts of situations, such as buying a new car or home, getting a major credit card, and even buying furniture and high-end jewelry.
A cosigner on a lease means a person promises to make the rental payments on the property if the tenant fails to do so. They can also be held responsible for damages in some states.
Benefits of Adding a Cosigner to a Lease
You have a lot on your plate as a property manager. There is always another task to do or another errand to run – but adding a cosigner to a lease can ease your workload significantly. Consider how these top benefits could change your workday for the better.
Peace of Mind
Landlords are often concerned about rent payment issues with new tenants. Adding a supporter to the lease imparts a well-deserved peace of mind. It gives landlords another option for recovering lost rent, deposits, and damage fees if anything goes wrong.
Double the Chances of Recovering Losses
Adding a cosigner to your lease can enable you to legally pursue payment from both the tenant and cosigner, depending on your state law. Some states even allow landlords to go straight to the cosigner for defaulted payment. Late rent payments and court proceedings affect the cosigner’s credit as well, so they are motivated to clear things up fast.
Expansion of Tenant Pool
People with bad credit or no credit are generally not approved to lease a home, because it’s far too risky for the property owner. There are many excellent future tenants who, for some reason or another, have flawed or minimal track records. Allowing tenants to be backed by a supporter can help you fill empty units with renters who might thank you with loyalty and a lasting business relationship.
College students are one group that can be particularly fruitful for a landlord. Not having any credit isn’t a signal that they will give you rent-payment headaches, though. It simply means they are just getting started, and you may be their first great reference. Having someone backing them means they have someone with good credit who trusts and believes in them. That’s a good sign that it’s safe for you too.
Cut Down on Workload
Adding a cosigner to a lease can seem like a lot of work at the onset, but it saves time and energy later when you need a helping hand with delinquent rent. Using a screening platform speeds up the process even further, saving you even more time when you need it most.
Gain a Competitive Upper Hand
Many landlords target risky tenants to maintain occupancy in competitive markets. People with a black mark on their record often have difficulty finding rentals. A qualified supporter can turn them into your upper hand in a world where reliable tenants are few and far between.
The benefits of leasing to a tenant who has a credible backer are reason enough to institute such a program for almost any property owner. It’s a simple and straightforward process, but it does require a bit of a time commitment initially.
How to Add a Cosigner to a Lease
Set aside a few hours to get a cosigner added to a new lease. They must be screened, just like any other tenant, so getting the rental agreement finalized takes a bit longer. Follow these simple steps to make this a part of your rental approach:
1. Confer With Your Applicant
Notify the applicant that they need someone to cosign their lease. Explain what led to your decision and remind them to choose someone who has the financial stability to handle any rental responsibilities that fall to them.
2. Screen the Cosigner
Perform a full screening as you would any new tenant. Run a background check, dig into the credit report, and take all the same precautions you do for every new applicant. Make sure the cosigner also fills out a rental application.
3. Establish a Cosigner’s Agreement
Create an agreement that complies with the laws of your state and the restrictions of the Fair Housing Act. It must outline the specific terms and responsibilities expected of cosigners, so be sure to list everything they should know. It should say in the agreement if you intend to pursue delinquent rent payments after two months, for instance.
4. Add Both Parties to the Lease
The lease is not legally binding until it is signed. It’s always a good idea to use the services of a notary public when lawfully binding agreements are concerned. The tenant and cosigner should both sign the lease.
There are substantial benefits to this approach, but they’re not enough to justify signing with an irresponsible tenant. Adding a cosigner to a lease doesn’t fix everything, and there are limitations.
Limitations of Adding a Cosigner to a Lease
Adding a cosigner to a lease is a dependable option to reduce the financial hit from a skipped rent payment, but it’s not without some risk for the landlord. Weigh the following factors before entering into such an agreement:
A cosigner can protect you against the financial downfall of an irresponsible tenant, but it can’t mitigate inappropriate behavior. Late-night parties, loud noises, and aggressive actions are still possible.
Inconvenience and Added Costs
There are costs to incorporating this approach into your property management system. Additional background checks and the cost of creating a separate agreement are two of the biggest. There may also be legal or administrative costs to consider, depending on the situation.
Each state has enacted specific steps a landlord must follow to pursue late rent payments, thanks largely to past abuses and aggressive tenant associations. Not following the process correctly will invalidate any collection attempts and even open the landlord to damages from the cosigner and tenant. A separate agreement will not help a landlord collect past-due rent if all steps in the collections process aren’t adequately followed.
There aren’t many backers who will eagerly take on a sudden, indirect commitment. Most will find every way possible to postpone, defer, or negate payment. This is why it is so important to ensure the agreement you create meets the standards set forth by your state and federal fair housing laws. An adequately developed document will help you avoid nasty shocks when you try to collect rent from the cosigner.
Landlords must do their due diligence when screening both parties. It is up to you to find out everything you need to know before entering into the lease agreement. Simply adding a third party doesn’t prevent any risk. You’ll need to make sure the cosigner has a steady and verifiable income with the financial assets required to pick up rent payments if needed.
Remember that each state’s landlord requirements can vary significantly. You may find an unexpected benefit in allowing cosigners on your property leases, but you may also encounter a few problems you have to address.
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