Rent Guarantors – An Alternative to Rejecting Applicants

Owners and managers of LIHTC properties are often faced with applicants who have less than desirable credit, income below the minimum required by the landlord, or no financial history. The common practice in the industry is to reject such applicants, thus limiting the available market for the units. Some owners will accept “gift” letters from parents or others as a way of ensuring that applicants have the income necessary to pay a property’s rent, but this is a poor practice and almost never results in getting the rent paid if a resident falls behind.

A better option is a “rent guarantor.” A guarantor is someone who signs a legally binding agreement to pay the rent if a resident fails – for any reason – to make required rent payments. Most commonly, parents act as guarantors, assuming the parents are in a sound financial situation and agree to make the guarantee. A guarantor may also be an unrelated friend (this is very unusual), a work colleague, or a business. For example, a company seeking a highly skilled young worker may agree to serve as a guarantor for the worker’s apartment. Government agencies also may serve as guarantors.

Difference Between Co-Signer and Guarantor

Co-signers generally sign a lease and have equal responsibility for payment of rent, while a guarantor is generally required to pay only when the lease-holder is unable to make the rental payment. A co-signer is at slightly higher risk than a guarantor since the landlord is allowed to immediately seek payment from a co-signer. The guarantor, on the other hand, is normally not responsible until the landlord exhausts legal methods for obtaining payment from the leaseholder. Nor does a guarantor have rights to access the apartment in the same manner that a co-signer does. This is why a co-signer is never recommended for a LIHTC apartment. State agencies may consider the co-signer to be a member of the household and require the counting of their income for eligibility purposes.

Steps to Take When Considering Accepting a Guarantor

From a landlord’s perspective, it makes good business sense to examine a guarantor’s finances. Consideration should be given to requiring the following documentation from a guarantor:

  • Pay stubs: obtain two or more recent pay stubs. If pay stubs are not available (e.g., the guarantor is self-employed and does not receive a salary), obtain a copy of the most recent federal tax return.
  • Two Bank Statements.
  • Credit Check: This should always be done.

When determining whether a guarantor can legitimately guarantee the rent, a minimum income for the guarantor should be required. Typically, a guarantor should be required to make at least 80 to 100 times the monthly rent. So, if your LIHTC rent is $1,100 per month, the guarantor should make at least $88,000 annually.

Alternatives to the Guarantor Option

There are guarantor services that operate in a number of areas of the country. These provide guarantees to landlords in return for a one-time upfront fee from the rental prospect. These guarantors will generally require that the applicant have good credit and an income of about 28 times the monthly rent (e.g., with a monthly rent of $1,100, the applicant will have to have a minimum income of $30,800 and good credit). However, from a practical standpoint, an applicant with these characteristics will probably qualify for tax credit rental without a guarantor so these services have limited utility for LIHTC owners and managers.

Finally, guarantor agreements should be prepared by attorneys familiar with both state and local landlord/tenant laws. Such agreements must be carefully crafted both to serve the purpose of the guarantee (payment of rent) and to protect the interests of all parties. The use of a rent guarantor is superior to acceptance of “gift letters” or other techniques that are designed to qualify otherwise non-qualified applicants, but rarely result in actual payment of rent when a resident fails to make the required payment. When structured properly, a rent guarantor agreement can result in increased occupancy and provide housing for responsible applicants who may not otherwise qualify.