Dollar Scholar Asks: What Are Guarantors and How Do They Work?

This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.

Like Spider-Man, being the Dollar Scholar comes with a lot of responsibility. Just as he always needs to be ready to skip class to sling webs in a skintight suit, I have to be prepared at any moment to answer a text from a friend about a money question.

Usually Spider-Man saves the city; usually I know the answer. (Over 200 issues into Dollar Scholar, I’m pretty good at this personal finance stuff.) Every once in a while, though, I come up embarrassingly dry.

That’s what happened recently. My 23-year-old brother, preparing to sign a lease on a new apartment, texted me with a question about the difference between a guarantor, a co-signer and a co-applicant. I’d never even heard of that last term! We ultimately figured it out — but I made a Peter Parker-style vow that next time, I would not be caught off guard.

How do guarantors work?

Clever Real Estate’s Steve Nicastro says a guarantor is a person who agrees to take on financial responsibility for a loan (or, in this case, a lease) if the primary applicant(s) can’t pay. In a landlord’s eyes, a guarantor is a failsafe — a formal backup plan that ensures rent will be paid every month by someone, even if it’s not the tenant themself.

Because of this, Michael Sherman, vice president of Zillow Rentals, tells me via email it’s “completely normal” for a landlord to require a guarantor, especially when an applicant is a first-time or low-income renter. Ditto for people who have thin credit files, low credit scores or frequent gaps in their employment history.

“In markets where rents are still on the rise and competition is fierce, having someone you trust act as your guarantor can be incredibly helpful,” Sherman adds. “It provides an extra layer of security and increases your chances of securing the rental you want."

Guarantors typically don’t live in the apartment they sign for. Because their purpose is strictly financial, their income has to satisfy certain conditions. This generally means the guarantor must earn four to six times the rent.

(The rules are different in the absolute disaster that is the New York City real estate market. Casey Roberts, housing trends expert and senior communications manager for StreetEasy, says landlords there typically require guarantors’ income to be 80 times the rent. Often this means a single apartment application will have multiple guarantors or use a company as a guarantor instead.)

Nicastro says that parents and really close friends can make good guarantors. In addition to satisfying the income requirements, my chosen guarantor should have a good credit score, a strong financial history and a deep understanding of the risks that come with signing the guarantor documents.

There’s a huge level of trust that comes into play here.

“If you don’t pay, they’ll be financially responsible, which could strain the friendship or cause family feuds,” he says. “Mixing family and money can be complicated.”

Guarantors versus co-signers and co-applicants

Guarantors differ from co-signers and co-applicants in that they’re only obligated to make payments if the primary borrower(s) don’t pay rent. The terms “co-signer” and “co-applicant” can be used interchangeably; they’re basically fancy words for roommate. Co-signers/co-applicants are involved in the day-to-day aspects of a lease, while guarantors are not.

Choosing to use a guarantor is not a decision to take lightly. Roberts suggests sitting down with my expenses at the beginning of an apartment search to determine how much I will be able to comfortably afford to pay for rent every month.

For context, right now, the national median rent for a one-bedroom apartment is $1,499, according to Zumper. But this varies a lot based on location — in New York, the median rent for a one-bedroom is a whopping $4,300.

“Even if you're not certain whether your future landlord will request a guarantor, it's wise to be prepared and start exploring your options before beginning your formal search,” Sherman says.

On the flip side, if I find myself being asked to be a guarantor, that’s also something to seriously consider before committing. I’ll be on the hook for payments if my borrower falls through, and if I start missing bills it will ding my credit score. Nicastro says it could also impact my debt-to-income ratio — and, therefore, my mortgage applications. There’s the risk of legal consequences, too.

The bottom line

Guarantors are people or companies who are on the record as agreeing to cover a loan (or rent) payment if the borrower (tenant) does not. It’s a major move with lots of implications.

“Choosing a guarantor, or becoming one, should be done carefully,” Nicastro says. “Have a backup plan in place — a plan for the ‘worst-case scenario’ and how you will deal with it.”

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