Consider Pondering the Implications Before Agreeing to Cosign or Vouch for a Rental Agreement for Your Offspring
As more young adults start their post-graduate lives, many parents are stepping in to help by serving as guarantors or co-signers on their children's apartment leases. However, this act of kindness can come with significant financial risks.
Parents who take on this responsibility face the potential of being fully liable for unpaid rent, property damage costs, legal fees, and other lease-related expenses if the child defaults. Although legally a guarantor is only responsible if the tenant defaults, modern leases often waive this protection, making guarantors and co-signers equally liable from the start. This means landlords can pursue parents directly for full rent payments without first suing or evicting the tenant.
Key risks for parents include full financial liability for rent and damages if the tenant fails to pay, potential legal action to recover owed amounts, which can impact parents' credit scores, possible damage to family relationships due to financial strain, difficulty in obtaining future loans since lenders consider guarantor commitments as liabilities, and long or indefinite responsibility periods, especially if leases renew and require new guarantees.
For parents considering guaranteeing or co-signing apartment leases, it's essential to understand the lease and guarantee terms clearly. Confirm whether the guarantee is joint and several (full liability for all rent) and the duration of the obligation. Prefer guaranteeing over co-signing if possible, as guarantors may only be pursued after tenant default actions, whereas co-signers face eviction lawsuits immediately, though in practice this difference may be small.
Assess your financial capacity carefully, as lenders or landlords may require proof of income and good credit scores before accepting guarantors. Discuss and set clear expectations with your child, treating the commitment seriously to avoid family disputes arising from financial stress. Consider exit strategies and monitor the lease, seeking to release the guarantor obligation if possible after a set period or lease renewal, and stay informed about the tenant’s payment status.
When multiple guarantors are involved or for joint tenancies, clarify who is liable for what share of rent to avoid unexpected full liability. Setting up a joint bank account for paying the rent can help monitor the account and ensure adequate funds are available.
Private landlords who own smaller buildings are more likely to negotiate, and services like TheGuarantors offer rent coverage that can protect landlords against defaults and may encourage them to accept tenants who would not otherwise qualify. The median U.S. asking rent fell 1% in April from a year earlier, to $1,625, providing some relief for parents considering this financial commitment.
However, this potential liability can be concerning for parents approaching retirement. Having a frank talk up front about the risks and implications of being a guarantor or co-signer is important. Debby Belt, a real estate agent, was able to guarantee only her daughter's portion of the lease for one of her daughters, while another daughter renting a two-bedroom apartment in Manhattan found the landlord wasn't flexible about limiting the guarantee.
In summary, while acting as a guarantor or co-signer is a common way parents assist adult children in securing housing, it carries substantial financial and relational risks. Careful understanding, communication, and ongoing management are essential to mitigate these risks effectively.
References:
- https://www.nytimes.com/2022/07/27/realestate/renting-with-parents-as-guarantors.html
- https://www.nytimes.com/2022/06/08/realestate/co-signing-rent.html
- https://www.consumerfinance.gov/education/articles/renting-with-a-co-signer-or-guarantor/
- https://www.nytimes.com/2022/08/10/realestate/co-signing-rent-credit-score.html
- https://www.nytimes.com/2022/08/24/realestate/renting-with-parents-as-guarantors-tips.html
- Parents who serve as guarantors or co-signers for their children's personal-finance obligations, such as apartment leases, should understand that they may face financial liabilities if their children default, and this can impact their credit scores and family relationships.
- To minimize these risks, parents should discuss and set clear expectations with their children, ensuring they understand the responsibilities involved in being a guarantor, and consider seeking services like TheGuarantors that offer rent coverage and may help negotiate with landlords.
