Guarantors, Escrow, and Rent Insurance: Options When Renters Don't Earn Enough Income
One of the key ways to ensure that your tenants will pay the rent is to check that they have sufficient income before signing a lease with them. Typically, landlords require tenants to have an annual income that's between 40 to 50 times the monthly rent. If someone seems like a good tenant but doesn't meet your income requirements, don't automatically turn them away. You have some options that can give you the assurance you need to rent to these tenants despite the lack of income.
New graduates starting their first jobs and renting their first apartments are a typical example of when the rent would be too large a portion of their income by the usual standards. In some cases, a grad's parents may be willing to cosign the lease and become a guarantor, taking on the responsibility of making the rent payment if the lessee fails to do so.
Many landlords only accept guarantors if they are local. It's also important to verify that the guarantor has enough income to meet this commitment. In most cases, this means checking that their income is as much as 80 to 100 times the monthly rent, allowing for their own housing expenses as well as the apartment they're guaranteeing the rent for. If the guarantor has no rent or mortgage payments of their own, the income they need can be less.
If you allow a guarantor, be sure the agreement specifies the circumstances when the guarantor needs to make payments and which fees, in addition to rent, they would be responsible for.
It's possible that the prospective tenant or guarantor has a low income but has a large amount of savings. You shouldn't rely on that alone, as the money could be spent on other things. You can ask the tenant to use those savings to pay the full year's rent upfront. In some cases, the tenant may not want to hand over a check for the full year but may be able to fund an escrow account, from which monthly payments would be drawn.
Many banks provide services to manage escrow accounts. Ideally the renter should establish the escrow account with the bank you use in order to simplify management of the funds. The renter will need to provide the bank with details specifying how funds can be taken from the account.
Rent insurance should not be confused with renter's insurance, which protects the renter's property. Rent insurance is insurance the renter purchases to protect their landlord; if the renter doesn't pay the rent, the company will make the payments. The insurer basically becomes a guarantor. This ensures you'll be paid, but you will need to begin eviction proceedings first.
If you are willing to accept rent insurance, you need to sign up with the insurer. Currently there is only one institutional rent guarantor: Insurent. Their service is limited to New York, New Jersey, Washington DC, Massachusetts, Illinois, Maryland and Virginia. There is no fee for landlords to participate; your agreement is needed solely to accept the lease guaranty.
Waive the Requirement
If none of the above options work, you can consider waiving your income requirements. In some circumstances, the character of the prospective tenant outweighs the concern about their rent. You also need to consider how long it will take to find another tenant who can meet the income standard. Depending on the rental market in your location, you may not want to wait to find another potential renter.
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