Should You Consider Renting With A Co-Signer If A Potential Tenant Has Bad Credit?
Sometimes, you are faced with having to rent a house with a co-signer. Having a vacant property is never good for the bottom line and it can be very stressful for every landlord out there.
Goals When You Have A Vacant
- Get the old tenant out
- Clean up the mess they left ASAP
- Advertise the house Fully screen all potential tenants
- Get the lease signed and collect the fees
- Get the tenant moved in
- Pray they stay for years and always pay the rent on time
[ctt template=”5″ link=”P5yEs” via=”no” ]Should You Accept A Co-Signer If A Potential Tenant Has Bad Credit?[/ctt]
Finding The Elusive “Perfect Tenant”
Once the “for rent” sign goes in the yard and the ads are placed online, the calls start coming in.
The process of “interviewing” potential new tenants begins.
In a perfect world, every person you talk to has a job they have been on for years and have perfect credit.
They don’t have:
- student loans
- medical bills
- previous evictions
- unpaid utility bills
But, we all know that this isn’t a perfect world and you will probably never actually meet anyone that has been employed long term, has no credit issues and wants to rent your house for the next 10 – 20 years.
Usually, someone that has great credit can qualify to buy a home and will not choose to rent. Most people that you talk to will have some type of credit challenges, which is why they are renting in the first place.
You have to know ahead of time what you are willing to work with before anyone starts calling. Most will bring up their credit issues when you talk to them and you will have some idea of what types of issues you have to work with.
The reality is that you are going to have to find a way to work with people that don’t have wonderful credit while minimizing your risk.
There is almost always at least one person who says they have terrible credit and will ask what our qualifications are in order to rent a house and will we accept a co-signer.
When someone asks me this, I know right off the bat that they don’t meet our income requirements, have bad credit or no credit at all.
Keep in mind that at this point, we have not met this person and we have not run their credit. We just know what they have told us so far and there is no telling what will actually come up when we do run their credit.
What is a Co-Signer
A co-signer is a third party guarantor. This person must be an adult and is usually a family member or a close friend.
I have heard of an employer agreeing to co-sign for someone as well.
This person needs to understand what they are signing up for.
What The Co-Signer Should Expect
The co-signer should understand that the landlord will:
- Run their credit
- Check their references
- Ask for proof of income
- Do a back ground check
- Possibly do a home visit
- Meet with them to make sure they understand what they are agreeing to
Many co-signers are shocked that their credit and references will be checked.
They don’t understand that they will have to have outstanding credit, a high income and usually will have to have some sort of assets to cover the rent they are guaranteeing.
Co-Signers Have Bills Too
Keep in mind that this person will already have bills of their own so this person must be able to pay person bills as well as be able to cover the bills of the person they are co-signing for if the tenant doesn’t actually pay.
It won’t help you out if the Co-Signer can’t cover the extra cost of paying someone else’s bills.
Their Credit Can Be Ruined
The co-signer must understand that if the Tenant does not pay, he is required to pay for the Tenant.
This person has the ability to completely ruin the good credit of the co-signer.
I usually schedule a meeting with a Co-Signer just to make sure he understands exactly what he is signing up for and that he is signing a legally binding document.
Things To Consider First
So, before we answer the question about whether or not we will accept a co-signer, we gather a little bit of information first.
Basic Requirements When Pre-Screening A Tenant
Our goal is to find tenants that are stable and who want to stay in our rentals for more than a year.
Some of our tenants have been with us for more than 10 years!
We try to weed out the tenants that job hop, have incomes that fluctuate and who have had trouble paying their rent in the past 3 years.
We have 3 very basic minimum requirements that every person has to meet or exceed before we will even leave our office and show a home, much less run their credit.
- Income must be 3x the rent. (Rent is $700, income must be $2,100 or more a month.)
- Must be on job at least 12 months. If there has been a job change, we will look at previous job.
- No evictions filed on this person in the last 3 years.
If a potential Tenant does not meet one or more of these criteria, you are going to have to dig a little deeper.
You may need to actually run their credit at this point.
I have talked to hundreds of people that swear their credit is fine and they insist that I run it.
Usually, it doesn’t work in the Tenant’s favor and I can quickly decide that I won’t rent to that person with or without a Co-Signer.
Credit History – The Truth
Once we do run credit, some pretty interesting things can pop up.
Failure to pay basic bills like gas, electric, water, phone and cable bills is a huge sign that this person is having trouble living on what he earns.
Some people are just irresponsible and you can see that in their checkered job and credit history.
I don’t like to rent to a Tenant that has a proven track record of job hopping, trouble paying basic bills and evictions.
Even a co-signer usually cannot make these types of Tenants grow up and be responsible.
My feeling is that if they can’t pay the rent, even if the Co-Signer does step up and pay, you have no guarantee that your rental home won’t be trashed.
[ctt template=”11″ link=”H2D2M” via=”no” ]A Co-Signer helps ensure that you will get paid and that is never a bad thing for the Landlord.[/ctt]
Ideal Candidates For A Co-Signer
- Life changing events
- No credit
You will find some people that have been good Tenants or even Homeowners, in the past, but have had life changing events happen that have affected their ability to keep a job which results in a cascade of other bad issues.
Or, you may find someone that really has no credit, good or bad. I will usually also give these people a chance to prove themselves.
These Tenants are people that I would consider working with.
Many of them need a co-signer in order to rent a home for the first time or just to get back on their feet.
I often find that they have already spoken to someone about being their Co-Signer and it is not unusual for the co-signer will come to see the home and be involved in the process.
This is the ideal situation and can work out well for the Tenant, the Co-Signer and the Landlord.
Renting With A Co-Signer or Not?
- At the end of the day, you as the Landlord have a house to rent and only you can decide if renting with a co-signer will complement your business model.
- Do your due diligence and make sure you have an accurate picture of the Tenant.
- You can never been 100% sure but follow your procedures, don’t skip steps and hopefully you will end up with a good tenant who can pay the rent.
- A Co-Signer helps ensure that you will get paid and that is never a bad thing for the Landlord.