Thoughts on unique situation with Cosigner?

Question

Hi everyone,

What are your thoughts on renting to this couple in this situation? They meet all our criteria except for their credit scores...but the cosigner has a good credit score.

- Joint application with Co-signer

- Male age 25 and female age 24, Co-signer is male’s father age 70

- Male and females combined net monthly income is $3311 (4 times the advertised rent of $750); the co-signer brings an additional income of $2469 to the table

- The male is just starting a new job with Amazon as a warehouse associate and the female is a custodian at a healthcare facility, with the employer just under a year.

- They moved back to Ohio from Florida in fall of 2021 to be closer to the male’s family

- Cosigner lives 3 houses down from this property

- Credit scores: male and female applicants’ credit scores are terrible, at 499 and 449; co-signer is good at 745

- No evictions for anyone, No criminal record for anyone; No pets

- Male and female have 1 dependent

- Move-in asap

Would love to hear opinions about this unique situation! Thanks!

Jeff Copeland · Answer

This is not unique at all. Getting applicants with low credit scores is something that happens all the time.

Obviously, you allow and consider co-signers (otherwise, why would they have one?), and the cosigner meets or exceeds your criteria. So what's the problem?

Your tenant screening criteria should be crystal clear on what your requirements are, and they should be applied consistently to all applicants in order to avoid fair housing and discrimination complaints.

The fact that you are asking us to interpret your screening requirements is cause for concern. (I'm not knocking you, simply pointing out that you may want to tighten up this process), for the following reasons:

Let's say you ultimately decide to deny these applicants housing because you just aren't comfortable with the whole cosigner thing and don't want to deal with it. And let's say they are of Asian descent (of course, I have no idea, I'm just making up an example).

Then another month goes by, and you get a similar application from a couple who are not Asian. Low credit scores, but an otherwise decent application with a solid cosigner. After losing another month of rental income to the vacancy, you're under pressure to get the place rented ASAP, so you cave in on the cosigner thing and rent to them.

The first couple now has reason to believe (and possibly evidence to prove it, even if it was never your intent to discriminate) that you denied them housing because of their race. After all, you rented the exact same unit to the other couple in the exact same circumstances - The only thing different was their race.

You end up in court, and the judge asks you if you have published screening criteria ("Yes your honor", and whether you understand and apply them consistently with each and every applicant ("Yes your honor").

But then the plaintiff's attorney shows the judge a printed copy of this thread from Bigger Pockets, which suggests you were winging it and asking for advice in a public forum about how your own criteria should be interpreted. This makes it very hard to claim that you always apply your screening criteria consistently, especially when you literally didn't apply your screening criteria consistently.

Again, I'm not knocking you - You haven't done anything wrong and this is all hypothetical. We are all here to learn and exchange ideas. I'm just pointing out how these things could be interpreted in a worst-case scenario, and highlighting why consistency is key when it comes to tenant screening.

BTW - An increased security deposit is a great way to mitigate the risk with these applicants, as noted above. But that too needs to be spelled out in advance and applied consistently to all applicants.

Joe Miller · Answer

Pops is local and has good credit is. I love Bens idea of rental references and meeting the father so he is solid with being held responsible if they default.

Keep us posted with what you decide.

Benjamin Aaker · Answer

It comes down to your criteria. You should put together a policy for who you will rent to and who you will decline. Stick to this. I realize this is a situation that may be outside a typical policy, though.

Low credit score is not something that I'll decline for by itself. I don't rent to people with evictions or foreclosures in the previous 7 years.

This might be a good time to have an additional security deposit. Check the laws in your state for the rules on this. In my state, we can ask for more deposit up front if there is a reasonable risk. That risk would be in the tenant's ability to pay their debts, evidenced by a low credit score. Keep good documentation on reasons.

Alternatively, the cosigner can come in. I'd do this or additional deposit but not both. Cosigner can help but may be difficult to go after if the tenants get behind. Lastly, be sure you contact rental references.

Veronica Crass · Answer

@Jeff Copeland thank you for your input! We are still new to real estate investing, and this is our first property. We are still in the learning process, so I looked to the BP community for input as this is a great community to help us learn and grow.

Veronica Crass · Answer

@Susan Mangan wow, this is a great breakdown, and it makes total sense! Thank you so much!

Susan Mangan · Answer

Hi Veronica!

A co-guarantor should have the ability to be able to pay their own bills, rent/mortgages easily before having to cover any one else's rent.

Say the rent is $500. Prospective tenant makes $1500 a month, but has really bad credit. The Co-guarantor has great credit, but is on Social Security only. The Co-guarantor pulls in maybe $1000 a month, and still has to pay their own rent/mortgage of $450. If the tenant doesn't pay rent, do you think the Co-guarantor will be able to come through and pay the rent? What about food, utilities, transportation, etc?

I'll take that same scenario with the tenant, and this time the Co-guarantor makes $3000 a month. They're able to cover their own rent/mortgage, your tenant's rent, and still have enough for food, utilities, etc.

The 6X amount for the Co-guarantor is a way to mitigate the risks of taking on a tenant with bad credit. So is asking for 2X the security deposit.

Note: Numbers are completely made up, but you get the picture.

Veronica Crass · Answer

@Susan Mangan just curious, what made you decide for 6x for the cosigner?

@Melanie Thomas thanks for the input! :)

Melanie Thomas · Answer

Hello! I would suggest you work on a detailed screening criteria that you would present to every applicant. This way they would know before even applying if they fit within your requirements. Definitely helps if you ever have Fair Housing complaints. Good luck and happy investing!

Susan Mangan · Answer

Will the father be able to pay his own mortgage/rent and the son's rent if it comes to that? We tend to look for 6 X times the amount of rent as far as the guarantor goes.

Veronica Crass · Answer

@Benjamin Aaker thanks for your input! I was thinking about the additional security deposit, so thanks for confirming that it's a possibility.

@Joe Miller thanks for your input, will definitely do more digging on the father as well!

Thoughts on unique situation with Cosigner?

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