What is this community's thoughts on cosigners?

Question

I have a potential tenant for my rental that didn't pass credit checks.

They have asked if they can have a cosigner.

Is this something I should consider?

This is my first rental- and I ended up getting in an easy fixer-upper that will have cash flow matching the 2% rule (monthly income is 2% of purchase price).

Steve Babiak · Answer

What does it mean that the applicant "didn't pass credit checks"?  Are you doing pass / fail based on FICO score number only?  If so, this will limit the pool of applicants you choose to consider.  I look at the status of their accounts on the credit report, and even then try to focus on those that I consider to be important.

A cosigner works best when the applicant seems to have sufficient income, so that the applicant themselves can normally make the payment.  Thus the cosigner becomes an occasional fallback.  If the applicant is short on income, then the cosigner will have to come up with money on a regular basis - and they might not like that.

Here is a link with one person's requirements; see "Guarantor" section:
http://www.biggerpockets.com/forums/52/topics/72781-landlording-best-practices?page=1#p420116

I also will accept a cosigner that owns real estate within the same county (with several other conditions that must also be met).

One other thing to consider is that the U.S. Gov't is like one great big cosigner - think how the Section 8 program works.

I once gave a conditional acceptance to applicants with the condition that they must get a cosigner; they never were able to get anybody to cosign.  Think about it: if their own family won't cosign, you definitely don't want them!

Bill Gulley · Answer

I have rented to lots of college students and each principal tenant had a co-signer, momma and daddy. I told them the reason was due to their lack of sufficient credit, as it's impossible for them to meet that standard and this would help to establish their credit. I did have some damages, never cost me a dime!

It depends on who the co-signer is. Good credit, job, sufficient income, disposable income and assets so they were unlikely to take bankruptcy. Qualify them just as you do the tenant. Good luck..

Ed O. · Answer

Chris, I think what Bill was getting at is even if you get a judgement, many times it's worthless, as many people don't have 2 nickels to rub together. If you do get a cosigner, you'd certainly want to make sure they have income and or assets to pursue.

What good is a judgement for $2000 if the cosigner is on disability and has no assets?

No one should ever be a cosigner, but as landlords, taking one is always wise.

What is the persons housing payment history and income? To me, these are what is likely to make or break your arrangement.

Nathan Emmert · Answer

What's your next best option?  Is there a line to fill the vacancy at your asking rent or is this it?

A co-signer gives you more security, they aren't going to watch a judgement on their credit... but given the nature of the real tenants credit, the chances of having to chase rent payments, potentially do an eviction, and file a judgement are higher.  In the end, with the co-signer you may get paid... but there's a lot of work involved.

Joe Delia · Answer

Medical and Bankruptcy doesn't bother me.  I'd want 3x monthly though.

Chris H. · Answer

Per the last two landlords, no months late in the last 48 months.  I like that.

Hm, concerning.

Present rent is equal to my asking rent.

There is currently no monthly debt obligations.

I'm thinking about this exactly, depending on the quality of the cosigner.

Steve K · Answer

I might take someone in that situation with first / last / security, but otherwise probably not.  Past experience has been that people who fall into this criteria will fall behind and eventually require an eviction.

Steve Babiak · Answer

Medical collections often will have to be overlooked so long as the tenant has solid history of on-time payments (I don't like to see more than one month late out of the prior 12).

That would not be sufficient income by my standards.  I require 3 times the rent in documented combined household pre-tax income as the norm; I will consider as low as 2.5 times if the present rent is equal to or greater than my asking rent, or if the applicant's credit report shows little to no monthly debt obligations.

Chris H. · Answer

Looks like medical collections and a bankruptcy a very long time ago killed the credit.

Both prior landlords reported that the tenant paid on time every month for two years but left the place in poor conditions (I think I'll try to call them and ask exactly how bad), but made no attempt to recover damages and simply kept the deposit.

The tenant actually warned in advance that this was due to a domestic violence situation with a partner who is now gone.

The tenant has had a stable job for about a year making a little over 2x the rent, and receives a very small amount on child support as well.

I guess I'll investigate who the cosigner would be and exactly what damages were done on the prior home.

Chris H. · Answer

My asking rent was at the higher end of comparables, I was actually just about to lower it slightly as there has been very few bites and I'd like to get it rented this month.  So next best option right now is to lower the rent $50 and keep it out there.

It's a dirt cheap two digit number to file small claims here and I live a few blocks from the courthouse, but I imagine it's still a huge pain.

What is this community's thoughts on cosigners?

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