Wondering what is a guarantor and struggling to rent an apartment with bad credit or low income? Read this article to know everything about a guarantor and how to find one to rent the apartment of your dreams despite bad credit or a problematic financial profile.
We all love those high-end, luxury apartments with the latest facilities and entertainment features. They are everything we could have dreamed of. You would drool over them because they are so cool with their luxury pools and lush green grasses. They are irresistible, but not everyone dreaming of one can get one. It’s a hassle even to rent one of them. It may seem easy, but it’s a huge deal for someone who has had even a few hitches along the way.
If you have a bad rental history, landlords will give you a hard time renting an apartment. You will need to find a guarantor in most cases, and in others, perhaps paying more for security and advance rent will do. In any case, a hassle ensues. There are quite a few formalities and legal complexities involved in the procedure. Having a guarantor is about more than bringing just anyone to put a signature on the documents. The guarantor must have a solid financial portfolio and a sound record, or the landlord will not accept them.
The guarantor will also need to ensure financial ability to pay the loan or lease in case of default. It is a huge responsibility, and you may struggle while searching for a guarantor. There are many legal aspects of involving a guarantor, and all of them are listed below. You will find all the answers in this detailed article in Any details you may want to know, big or small, standard or unusual.
What is a guarantor?
A guarantor is an essential financial figure who commits to covering a borrower’s debt if the borrower fails to meet their loan responsibilities. This commitment often involves pledging personal assets as collateral against the loans, establishing a safety net for lenders. Individuals occasionally even assume the role of their guarantors, leveraging their assets as security.
Simply put, a guarantor ensures that a borrower’s debt is repaid under all circumstances, erasing uncertainty and securing lenders’ investments. By offering a guarantee, the guarantor steps in to cover the debt if the borrower defaults, providing lenders with peace of mind.
In the business realm, guarantors typically agree to pay a borrower’s debts if they cannot do so themselves, serving as collateral for loans. While usually third parties, individuals can also be their guarantors, leveraging their assets for securing loans, such as when acquiring a business using property equity.
Residential guarantors are crucial for home loans and renting scenarios. Often required for residents with limited income or first-time renters, residential guarantors assure rent payments. Conversely, advertisement guarantors often serve as security for loans in business proceedings.
It’s essential to separate between guarantors and co-signers. While guarantors promise payment obligations, they do not gain ownership of the borrower’s purchased assets. On the other hand, co-signers share ownership but also share financial responsibility. Becoming a guarantor is a significant responsibility, typically undertaken by individuals who know the borrower well.
Parents often become guarantors to help their children embark on the homeownership journey. In business or personal transactions, guarantors are pivotal in facilitating credit access and ensuring financial stability.
Understanding a guarantor
A guarantor must be over 18 and reside in the country where the payment agreement occurs. Guarantors usually have to show good credit histories and enough income to cover the borrower’s loan payments if the borrower defaults. The lender will seize the guarantor’s assets in case things go down.
Default is one of many situations you should worry about as a guarantor; if the borrower constantly pays the installments late, the lender can charge penalties and additional interest rates against the loan. So a guarantor has a lot at stake when the real deal is between a lender and a borrower.
Why and when will you need a guarantor?
A few scenarios require a guarantor if you want to lease an apartment or get a loan. Imagine that you finally found an apartment that matches your dreams, something you had always wanted. Still, suddenly, and out of nowhere, the property manager or landlord starts speaking of the shortcomings in your credit profile. He may have found some red flags while reviewing your application for the apartment.
The red flags that they may see:
Poor rental history
If it’s your first time renting a house, you will need a guarantor because lenders and landlords usually do not trust first-timers. It happens because the landlords do not know how you will behave once you have a financial commitment.
On the other hand, if you have been renting places for quite some time, you will do ok even without a guarantor. However, you will still need a guarantor if you have been renting homes with late payments and bad credit and payment reputation. A guarantor with good credit and a stable financial condition will help straighten things out and gain your landlord’s trust.
Have little or bad credit? You will need help from a guarantor to sound more trustworthy on the lease papers. If you have bad credit, more significant projects, and more prominent apartment owners may not be pleased with your profile and will have difficulty trusting you.
In contrast, if you apply for a small apartment in a small project, landlords will show more leniency towards you, especially when you have a guarantor.
If you earn well, you will probably not have to look for a guarantor because your profile shows enough monthly funds to sustain life and the rent. Usually, when you have rent up to one-third of your income, your landlord will likely not ask for a guarantor. However, you will need one if your rent is more than this.
Bankruptcy on your credit report
We all know it’s not possible to keep your bankruptcy secret. No matter how you try, your landlord will know about it. The worst part is that it will keep showing on your report for 7-10 years. Bankruptcy is a huge red flag for landlords because, as a borrower or a tenant, you do not seem like you can pay the installments on time when you are bankrupt.
When your financial situation does not seem so sound, you should look for a guarantor.
A guarantor with a sound financial report will alleviate your landlord’s concerns about your past bankruptcy.
You have a prior eviction.
Anything that says that you have not been a good tenant, you should get ready for trouble. For example, the landlords will demand a guarantor if you have a prior removal in the record. It wouldn’t matter the reason behind the previous evictions; the landlord will take it as a red flag. A guarantor saves you from a bad situation by making the investment safer with their financial report.
Unreliable employment history
If your employment history shows signs of a lack of reliability, it could make landlords have second thoughts before approving your application. Landlords want to ensure you have a steady flow of money every month, and paying the monthly rent is not an issue for your income/assets.
Anything negative regarding your financial record will make things difficult for you to rent an apartment or borrow money from an institution. Lack of reliability on your credit or financial report is a legal reason a lender will ask for a guarantor. A guarantor helps ease your situation by putting forward their financial statement to hedge against unreliable finances on your profile.
Sometimes, a landlord will ask you to bring a guarantor outwardly, even if you do not have red flags on your profile. There are different kinds of guarantors.
Types of guarantors
There are many different scenarios in which you would need a guarantor. The designs range from helping people overcome the uncertainty of poor credit histories to assisting those who do not have a high enough income to purchase or lease homes. Guarantors don’t necessarily have to be liable for the whole monetary obligation in the deal. Their financial responsibilities depend on their type.
1- Guarantors as certifiers
A guarantor’s role is not just to make your lease or loan easy; a guarantor can even help you land a new job or help get your important documents, like your passport. Their role is not limited to pledging their assets as safety against loss or risk. When a guarantor is helping to bag a job or get your documents, they act as a certifier who claims to know you personally and will verify identities by confirming photo IDs.
2- Limited vs. unlimited
A guarantor’s role is always defined in the agreement and can be limited or unlimited. In a limited capacity, a guarantor will only extend his guarantee for a specific period; after the lapse of the time of the contract, the borrower will fulfill the requirements of the loan alone. Any problems that may come after the end of the guarantee period will be borne by the borrower alone, and the guarantor will have no responsibilities at all.
A limited guarantor may also be responsible for only a certain percentage of the loan, not the whole amount. On the other hand, Unlimited guarantors are liable for the entire loan term. Their guarantee extends to the loan until it is fully reimbursed. They are also responsible for the whole amount, not a certain percentage of the loan, like a limited guarantor.
Advantages of Guarantors
Guarantor significantly boosts a borrower’s likelihood of securing loans or rentals while creating opportunities for borrowing larger amounts that can aid in significant life expenses. Moreover, a guarantor’s involvement can positively impact the borrower’s credit history, enhancing their financial standing.
- Enhanced loan approval process: Including a guarantor elevates the chances of loan or rental approval, streamlining the process.
- Expanded borrowing capacity: Borrowers can access more considerable loan sums with a guarantor, enjoying increased financial flexibility.
- Credit enrichment: The participation of a guarantor supports borrowers in establishing a favorable credit history.
Disadvantages of Guarantors
Guarantors assume a substantial responsibility. If the primary borrower fails to fulfill their obligations, the guarantor becomes accountable for the debt. This financial obligation can strain their resources and potentially lead to legal repercussions. Additionally, the primary borrower’s non-payment can adversely impact the guarantor’s credit score, affecting their financial standing. Furthermore, serving as a guarantor might restrict their ability to obtain separate loans, given their existing commitment.
- Financial accountability: Guarantors bear legal responsibility for the debt if the primary borrower defaults, potentially placing the repayment burden upon them.
- Credit ramifications: A guarantor’s credit score could suffer if the primary borrower misses payments or defaults.
- Limitation on future borrowing: Pledging as a guarantor restricts the ability to secure additional loans for distinct purposes, curbing their borrowing capacity.
Understanding the shades of serving as a guarantor empowers individuals to make informed decisions regarding their financial commitments, ensuring they are well-prepared to navigate the advantages and disadvantages associated with this significant role.
How to find a guarantor?
The most common way of finding a guarantor is to ask your parents for help. They are the best, most reliable support you can ever get. You may feel uncomfortable with this setting. Still, it’s the easiest to find and the smoothest way to manage when renting an apartment or signing up for any significant financial responsibility.
Having close and trustworthy friends also comes in handy when you are in a fix. Reliable friends mean you will not have a problem asking them to pay your loan or lease when things are going downhill for you.
It is essential to explain to whoever guarantees the loan that the borrower doesn’t necessarily need to default. Whether the guarantor is one of your parents or a close friend, they should know they guarantee to assure the lender that his money will repay even if the lender lands in issues. Friends and family are the best options for cash, but it’s always better to explain the situation fully to avoid any future inconveniences.
If you don’t have someone close who will be willing to act as your guarantor, you can buy the service, i.e., pay a guarantor to work in the said capacity because it is a strict requirement in most cases. The guarantor’s pay can be between 4% to 10% of the annual rent. A guarantor service can cost money, so make sure you are comfortable paying it. It can be a long-term affair, so calculate the cost and hire a guarantor only if you are comfortable paying it. If you don’t feel comfortable paying the fee, you might as well drop the idea altogether.
Your potential guarantor must be financially stable, reliable, and trustworthy. You should be comfortable with the person at a personal level. Having an excellent credit history counts. If you know and are close to someone with these characteristics and an excellent credit history, ask that person.
Listing a guarantor is a formal business. There are lots of formalities involved in the procedure. The guarantor will have to submit proof of their income, sign some legal papers and comply with all the other requirements that come with the contract. Your part is to always be timely regarding the payments so that the guarantor can avoid unnecessary issues. If you keep a good record on your first lease, you can have a more manageable situation in all the coming instances.
Alternatives to a guarantor
Although there are many ways of getting a guarantor, it’s not impossible to land in a situation where you need an alternative to a guarantor. Of course, there is the option of hiring your guarantor when there is no one among your friends or relatives to take the responsibility, but that comes with financial bills, which may be an extra load for some. If the fees are too much, most renters will hesitate to pay extra for the service, and the guarantor’s service fee will not be a one-time thing. Instead, it will be a long-term commitment.
However, to avoid assuming the prolonged financial obligations of a guarantor service, it is advisable to explore other alternatives. The best thing is to pay extra money upfront. Many landlords are open to this option. If you could afford to pay extra money in addition to all the necessary fees and rent, perhaps a few months’ rent in advance, your landlord may be happy with this settlement. Some also accept a higher Security fee as an alternative to guarantors’ service.
It is a great way to avoid the long-term responsibility that comes with a formal guarantor. However, this option works if you have some money in your account.
In general, if you have a good enough and smooth income source, but it’s just your rental history that’s a little offbeat, there are high chances It will review your application positively, and you will be allowed to use alternatives to a guarantor’s service.
However, you may need a guarantor because you need more money to pay higher fees or rent in advance. In those cases, use one of the alternatives discussed below.
1- Use a guarantor service
As described above, you can always use a paid guarantor service if things are not working with friends and family. However, a fee is attached to this, which sometimes gets complicated. You should consider using other alternatives for some excellent reasons.
2- Present your case well
Your landlord doesn’t know who you are; you are just a file on his desk. He is judging you from your crest history and income sources. If you have bad credit, it’s understandable that they do not find it safe to rent their property to you. If your disapproval is because of reasons other than poor credit, it’s a good idea to meet your landlord in person. When you do that, present yourself well.
Dress up well, be patient and pleasant throughout, present your case in the best possible manner, and there is a good chance your landlord will approve your application. Try and think like your landlord; stand in his shoes and consider who you will trust with your property. In the next step, try to be the person you would count if you were a landlord.
We all want posh, luxurious, high-end apartments with top-notch facilities like a pool and lush grounds. However, you may only be able to afford this luxury at some times in life. You may need more income, or your credit history needs to be slightly off! In any case, if you are thinking big and luxurious, think again.
Renting a high-end apartment will come with many costs, and if your budget needs to be more spacious to fit in the responsibilities easily, you might want to think differently. Let go of your expectations and look for smaller apartments with all the basic facilities. You will have a nice place to live in, and there will be no extraordinary financial responsibilities ruining your peace of mind.
Smaller apartment complexes that are locally built and run are easy to rent. These rentals usually have more flexible rules than those high-end, corporate-owned apartment complexes.
3- Pay more upfront
As discussed above, you can save your image by paying a little extra upfront. Pay advance rent or deposit a chunkier security fee; you will be safe from a paid guarantor service’s nagging responsibilities and formalities. A more oversized security fee makes you look safer and more reliable in the eyes of the landlord.
Guarantors are only sometimes necessary but are great for those with poor credit, rental history, or low income. When your rental history or credit score is not up to the mark for a dream apartment rental, you should look for a guarantor because they let you live the life you have always dreamed of despite all problems and complications.
Guarantor or cosigner?
You would see many people who use the terms cosigner and guarantor interchangeably like they are the same. They are not, though. A cosigner signs the rental contract with you, just like a guarantor, but his responsibilities and rights differ significantly.
A cosigner is equally responsible for all the fees and liabilities of the contract and has the right to live in the same apartment as you (the one where he is a cosigner).
In short, a cosigner has more rights under the contract than a guarantor and is also responsible for much more. Your guarantor is responsible for paying the loan when you default, but a cosigner splits the rent and all fees that are part of the rent. It is like a half n half responsibility between the cosigner and the one renting an apartment.
Can there be more than one guarantor?
Usually, you will only see one guarantor on one contract. No landlord likes to go for several tiers of guarantees. If this person defaults, that person will pay, and another will be responsible if that one goes bankrupt. One person needs one guarantor, and that’s it.
However, in a completely different scenario, the landlord may ask for two guarantors when two roommates rent a room or apartment. One guarantor may suffice, but both roommates have barely enough income to pay the rent. In such a case, the landlord may feel insecure and demand a separate financial guarantee for both inmates. This way, we will have two guarantors on one deal.
Can your guarantor be out of State or out of the country?
The answer to this question needs to be revised. It all depends on the landlord you are dealing with. Generally speaking, a guarantor will always be someone who lives close to or at least in the same city and can guarantee prompt delivery of the fees and funds when needed. However, things may differ in metropolitans, where people come and live worldwide.
Think of it like this, if you are in NY and want to rent an apartment, you may have a guarantor like among your friends, but they may be somewhere other than New York. How will you proceed with renting an apartment in this condition? The answer is simple; you will ask your landlord! Discuss the matter with him, and you will know the exact answer. Since there are no standards in this case, you must ask the man at the helm- the landlord!
When you prepare to get an apartment, quite a few things are up for consideration. You will need to be very careful and choose your options very wisely.
You have two options in front of you; either choose a guarantor or a cosigner. A cosigner will probably share the apartment with you, and the guarantor will only make the landlord’s investment fail-safe with their financial reputation. If you have hired a guarantor, there will be fees involved.
Whoever you choose to lighten the burden of renting an apartment must thoroughly discuss all terms and conditions. Sit them down and explain everything in detail. In most cases, you will find discussions to be exhausting. You may see yourself needing to include essential points. Simply putting things in front of them can be challenging. The best thing to do is to have a separate agreement signed by them that explains everything articulately and get their consent formally.
You must remember that once a person becomes your guarantor or even your cosigner, your relationship with them will change forever. It will not be a harmless friendship anymore. Money will enter the equation, and things will get complicated. You recommend choosing your guarantor or cosigner very wisely; do not choose people too dear to your heart among your friends. Choose loyal, old, and trustworthy friends, but not those with whom you have any pretenses to manage.
What’s the difference between a guarantor and a co-signer?
Though often used interchangeably, “guarantor” and “co-signer” vary in meaning. A co-signer shares equal responsibility and ownership from the start, while a guarantor steps in only after default. Co-signers bear heavier financial burdens.
Can parents act as guarantors?
Parents often guarantee their child’s initial rental due to the child’s limited income.
What qualifications for becoming a guarantor?
Criteria vary among agreements and lenders. At a minimum, guarantors need high credit scores, clean credit reports, and qualifying income based on payment frequency.
What is the required income for guarantors?
Income criteria depend on specific loans or property rents. Landlords typically expect guarantors to earn at least 40 times the monthly rent.
What if a guarantor can’t pay?
If a guarantor can’t pay, they and the tenant share liability. The lender seeks repayments from both, affecting their credit profiles.
Are there costs to being a guarantor?
Being a guarantor could incur costs if the borrower defaults, necessitating repayment and risking home repossession.
Is long-term commitment required?
Guarantors can only commit for part of the mortgage term. After equity accrues, most agreements allow removing the guarantor.
Can guarantor status be stopped?
Once a loan agreement is signed and disbursed, removing guarantor status is generally impossible due to prior influences on loan approval.
Can those with poor credit be guarantors?
Guarantors with bad credit are unlikely to be accepted by lenders, limiting their ability to support borrowers with low credit scores.
Does guarantor status affect credit?
Lenders conduct credit checks before you become a guarantor, often as a ‘soft’ search. Defaulted payments by the borrower can negatively impact your credit report.
Does the guarantor role appear on credit reports?
Typically, becoming a guarantor doesn’t directly show on your credit report. However, involvement in payments due to defaults can impact your credit record.
Impact on mortgage eligibility?
Assisting others’ credit may affect your future mortgage applications due to increased liabilities. Accumulated debts from guarantor roles could hinder approval.
What’s a guarantor check?
Lenders perform checks before approving a guarantor loan, including credit and affordability assessments.
Income needed for the guarantor role?
No fixed amount exists; lenders evaluate your repayment capability. Some may demand specific income or substantial assets to ensure repayment.
Renting an apartment for yourself may be a piece of cake outwardly, but it involves several formalities. Too many for newbies’ taste! It is a complicated business, but it’s tough for those doing it for the first time. Being a guarantor ensures financial responsibilities- the person will have to pay the loan, lease, or rent if the main signee of the contract defaults. Due to the involvement of a huge financial responsibility, a guarantor is always meticulous. It may not be easy to bring him around. Having someone agreeing to be the guarantor will be quite a task. Many options exist if you do not find someone among family and friends.
Whether you hire a guarantor or find someone among your loved ones, you need to be careful, honest, direct, meticulous, and responsible for your part so that no one has to go through problems because of you.
The fact that you have a guarantor does not mean you must default on your loan; try your best to avoid such a situation under any circumstances.