If you're thinking about renting a house or apartment, you might hear the term “guarantor” tossed around by potential landlords or lending companies.
A guarantor, sometimes called a lease guarantor, has a very simple job. If for some reason a tenant is unable to handle their lease during any given month, it is up to the guarantor to step in and ensure that the monthly rent arrives in the landlord’s hands-on time.
Why do you need a guarantor?
It is important to note that you might need a lease guarantor even if you have a great credit history.
Let’s say you just finished university and are hoping to rent your first property. You've used a credit card since high school and always make timely payments. Now that you are finished with school, you are managing your student debt responsibly. However, since you have never rented property before, landlords might still worry about your ability to pay.
On the other hand, if you have poor credit or are renting in a highly competitive market, landlords will also require you to have a guarantor. Much like co-signing on a loan, this is to ensure you can meet the financial obligation of rent.
How do you find a guarantor?
Are you trying to rent a home with a landlord who requires a lease guarantor? Your first step should be to ask a local family member with whom you have a good relationship.
However, if no local family members are available, it is okay to ask a trusted mentor or friend. We specify local family members because it is essential that the guarantor be someone with a great credit score who lives in close proximity to the property. This way, rental agents feel as though they could easily try to collect payment should the need arise.
If you are renting a property in New York City and your guarantor lives in Houston, the landlord might think it could be harder to get the money.
It is also possible to hire a guarantor. There are now many companies that are willing to fill in this role for you.
What are the risks of becoming a guarantor?
If someone asks you to be their guarantor, you need to take pause and examine your relationship with the person. This is because acting as guarantor for someone is a big financial responsibility.
Even if you are completely sure that the person can make their rent each month, if you sign the paperwork, you are putting your own finances on the line should they not be able to.
Should all landlords require a guarantor?
As a landlord, requiring that tenants use a guarantor is a great way to secure a guaranteed bond. This because there are two parties responsible for paying the rent each month. Because of this, it is less likely that you will have any sort of financial issues with your tenant.
Requiring a guarantor is also a smart idea in a university town.
In these towns, there are lots of students (both domestic or foreign) who will be renting a property for the first time. If you live and own rental units in a city that recent graduates tend to move to (New York City, Boston, San Francisco, etc.), then requiring a guarantor is one of the easiest ways to protect your financial assets.
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