Rental Guarantor: what is it and what is it for when renting property?
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If you are looking to rent a property or know someone who is, you have probably come across the term “rental guarantor”. For many years, they were very popular and sought after in property rentals, and although they have lost some popularity, they are still a possible guarantee to be offered when signing the rental contract.
In 2019, for example, 46% of rental contracts in São Paulo included the presence of a guarantor, according to data released by the São Paulo Housing Union (Secovi-SP).
In general, choosing a guarantor is related to providing financial security to the property owner. This is done so that the owner is sure that the rent will be paid.
However, we need to be realistic about this matter: being a guarantor is not a bed of roses. There are many risks and disadvantages to being a guarantor. This explains, to some extent, the difficulty that some tenants face in finding someone who will agree to be their guarantor.
Therefore, in this text we will explain everything you need to know about guarantors. Their characteristics, responsibilities, and advantages and disadvantages. But most importantly, how to find a guarantor as a guarantee when renting your property.
Before we begin, here are the topics that will be covered:
- What is a guarantor?
- Who can be my guarantor?
- What are the advantages of having a guarantor as a guarantee in the rental agreement?
- What are the risks of being someone's guarantor?
- Are a guarantor and a letter of guarantee the same thing?
- What is the difference between a guarantor and a surety bond?
- How to get a guarantor for rent?
Let's get started!
What is a guarantor?
A guarantor is a person who undertakes to pay another person's debt if that person fails to pay the respective creditor.
As a consequence of this attitude, the guarantor may end up becoming a debtor as well, often having to bear the entire debt if the main debtor defaults.
A guarantor is generally an extremely trustworthy person who can be requested as a guarantee for credit in various different types of contracts, such as loans, financing, and even as a guarantee for the rental of real estate . This last case will be the focus of this text.
In practice, it is a person who has a good financial condition and security. And it is only activated when the person who took out the credit does not pay their debt.
The role of a guarantor involves several legal and bureaucratic issues. To make things easier for those who need this role, two main types of guarantors have been created to be chosen depending on each case. They are:
- Joint guarantor: will be responsible for the debt as soon as it is incurred, and may be called upon at any time by the creditor if the contractor defaults.
- Subsidiary: the opposite, assumes responsibility for the debt only after the assets registered in the contract have been used to pay off the debt. It is triggered if the contractor is unable to pay.
What is a rental guarantor?
A rent guarantor is the person who will be responsible for paying the rent for a tenant if they default.
In every rental agreement , some type of guarantee must be offered to the property owner so that he or she is not financially harmed during the rental period. Among all the possibilities, choosing a guarantor was for many years one of the most common to be used. However, it has lost its popularity to other models.
This happens mainly because nowadays, most real estate agencies are very demanding when choosing a guarantor. This person must meet a series of characteristics and rules in order to be selected. Not to mention the huge losses they will suffer if they are sued.
What is a financing contract guarantor?
In this case, the guarantor of a financing contract, as the name suggests, is the person who acts as a guarantee in financing cases in general.
When applying for financing from banks, the debtor will pay the debt through agreed monthly installments. To avoid financial losses if this amount is not paid at some point, it is very common for the bank to require a guarantee and the guarantor is one of the ways to offer a payment guarantee.
Depending on the bank, in cases of financing, the presence of two guarantors may still be required. Since everything must be legally proven, some of the required documents are:
- Photo ID;
- Proof of income;
- Proof of residence;
- Updated income tax return
Who can be my guarantor?
Being a guarantor can be a lot of work, can't it?
There are many legal and bureaucratic issues regarding who can be chosen as a guarantor. Among them, the main requirement is to have a good financial situation and history!
Legally, a guarantor can be a legal entity (if the company's articles of association allow it) or an individual over the age of 18. Furthermore, they must prove that they are in a good financial situation to cover any debts the tenant may have.
Your income must be equivalent to three or four times the rent plus rental charges, such as condominium fees and property tax.
To do this, real estate agencies usually require you to present bank documents that prove your stable income. In addition, in some cases, you may need to show that you are able to pay off the debt for a few months.
In addition, it is usually required that the guarantor of rental contracts has at least one paid-off property in his/her name. Depending on the contract, it may also be required that this property be located in the same city where the agreement is being signed. Some real estate agencies require up to 2 properties!
These requests, which often seem absurd, have a reason. When an individual agrees to be a guarantor, he or she automatically puts up his or her own assets as a sort of additional guarantee of payment. That is, if the main tenant fails to pay the rent, the responsibility falls to the guarantor. If the guarantor also fails to pay, the guarantor's assets may be auctioned off to pay off this debt!
Now comes the curious part: if the guarantor's property has not been paid off, it can even be auctioned to honor the outstanding debts, but the bank that financed the purchase of this property has priority to receive the money, that is, the property can go to auction and still not have anything left to pay the tenant's original debt! That is why real estate agencies often require the guarantor to have a property and that this property must already be paid off.
Now, the requirement that the guarantor have two paid-off properties is even more curious. A family's first property is usually considered a "family asset." This means that it is important for maintaining the dignity and structure of a family. Since it is an asset that is very important for family security, many judges try to protect the family by preventing these assets from being forcibly auctioned off.
Result: if the guarantor only has one property, even if it is paid off, it may not be possible to hold an auction to pay off the debt of the defaulting tenant. Because of this, some real estate agencies have started to require the guarantor to have two properties. Obviously this makes sense, considering the landlord's security, but it becomes almost impossible to find the guarantor!
If married, the guarantor's spouse must also provide information and prove his or her assets, demonstrating that he or she is aware of the possibility of a lien on the property if necessary. So many rules! It's no wonder that the search for a guarantor has lost popularity, right?
Even so, we still see many rental contracts being signed with the presence of a guarantor. Let's understand why better.
What are the advantages of having a guarantor as a guarantee in the rental agreement?
Although the use of a guarantor has lost strength in property rentals, it is still an option available on the market and chosen by many tenants. Therefore, if you are considering using a guarantor, we cannot fail to mention the advantages that this model will bring.
For the tenant, the main benefit is having a type of guarantee that does not generate any expense or financial outlay on their part.
Not to mention that with guarantors who have good financial conditions and no history of bad payments, the rental process can move faster.
For the landlord, he will have the security of not suffering financial loss in cases of non-payment of the rent amount. This is because he will have a guarantor who has proven income to cover the debt.
However, as we said above, we also have to highlight the disadvantages of a guarantor and, furthermore, the reasons that led to their loss of popularity.
What are the risks of being someone's guarantor?
Being a guarantor can involve huge financial and legal losses if you are sued.
As we said, a guarantor will have to pay all of a tenant's rent debts. Now, have you ever stopped to think about how much that would be? Imagine if the tenant stopped paying their rent for months, especially in a property located in an area with a high cost of living... the thought of it makes your wallet ache!
Being a guarantor can cause serious financial harm. Even if you are in a good financial situation, there is no denying that you may end up spending a lot of money. Especially if you have to pay other expenses, repairs or debts that need to be paid off.
Furthermore, another pain that affects many guarantors is in cases where they are forced to seize their assets as a way of paying off their debts. That's right: your own property and family assets can be seized.
However, there is a restriction: according to a new court ruling from March this year, a guarantor's family assets cannot be seized in cases of commercial lease.
All of these reasons are more than enough to make people think twice about becoming guarantors. But for those who have already accepted this role and decide they no longer want it, is there a way out?
Can a guarantor waive his responsibilities?
Yes, a guarantor can waive his or her responsibilities if he or she wishes. However, there are rules.
To stop being a guarantor, it is important that there is an agreement between the guarantor, the tenant and the landlord. Everything can be resolved through discussion and the terms of the contract can be changed and adapted to this situation.
To do this, the guarantor must inform in advance of his decision so that the contract can be adjusted - whether by choosing a new guarantor or another guarantee model.
Otherwise, it will be necessary to involve the courts and analyze the case. Whether the rental contract was signed for a fixed or indefinite period, and then determine the best solution.
This confusion can be huge! That's why many people end up not even starting this process by becoming guarantors.
Are a guarantor and a letter of guarantee the same thing?
No! Many people confuse these terms, but if you are looking for a property, this difference needs to be very clear. Mainly to avoid any kind of problem.
The guarantor, as we have explained, is a person who takes responsibility for covering the debts of a third party. The letter of guarantee, in turn, is also a surety contract. However, here, the person who assumes the responsibility of the guarantor is a banking institution.
It also guarantees enormous financial guarantees and can be used for various purposes, whether for tax debts, legal executions or many other types of contracts.
A very important feature that needs to be highlighted is that the letter of guarantee costs money. Since it is a service offered by a bank, the bank requires a payment from the tenant to cover this responsibility.
Generally, the letter of guarantee establishes limit values that the financial institution agrees to cover and is rarely used in residential leases, being more common in commercial leases.
What is the difference between a guarantor and a surety bond?
This is also a very common confusion among tenants, and it must be clarified once and for all.
Unlike the previous topic, where the terms were somewhat related, surety insurance is a model that works as a substitute for the guarantor. Here, the tenant usually takes out insurance through an insurance company via a real estate agency, where the property owner is the insured.
It has specific coverage for the rental value and all fees related to it, such as IPTU, condominium fees and other policies that can cover water, electricity and other legal fees.
In addition to being easier to request, surety insurance has enormous advantages that have made it one of the most accessible rental guarantees for tenants. Want to know why?
So come check out our full text about surety bond insurance on our blog! Click on the following link and read: Surety Bond Insurance: how does it work and what is it?
How to get a guarantor for rent?
If you've come this far, then you understand the reasons why many people don't want to be guarantors for others.
Despite this, many tenants and lessees still agree that they prefer this type of guarantee when signing the rental agreement.
If you find yourself in this situation, then we have put together some tips to help you find a guarantor for your rental. Check it out!
Search for people nearby
If you are looking for a guarantor, a great tip we give is to try to start by looking for people who are close to you. Especially given the greater resistance to accepting this role.
Being a guarantor involves a lot of responsibility, so it might be easier to find one among your family members.
These will all be people with whom you have a mutual and highly trusting relationship.
And remember: if you receive a negative response, don't get angry and make it clear that you understand the situation. After all, if you don't pay the rent, she will be the one who will have to pay your debts.
Choose someone who has the means
It is not enough to be someone close to you who you have an affinity with, if you do not have a good financial situation to bear the responsibilities of a guarantor.
You must choose a person who can prove that they are able to pay despite possible financial losses. Whether through a stable income or, as we said, by paying off a property in their name.
Be transparent with the guarantor
When making an offer to a potential guarantor, it is important that you are clear and open about your situation. Explain the contract you intend to sign, what your expenses will be, the chances of defaulting, and any other conditions that will affect your decision.
Many people do not really know what being a guarantor entails. Therefore, it is important to explain to them very clearly the responsibilities involved in this commitment. Your future guarantor should be clear about all of these issues and the possible consequences of being sued, before accepting the proposal.
Offer means of guarantee to the guarantor
If possible, offer the guarantor some guarantees that you will be able to pay the rent and will not leave him/her to shoulder your debts.
This way, he will feel more secure in accepting the proposal, always taking into account what could happen in the worst case scenario.
Negotiate other forms of bail
Finally, if even after following all these tips you are having difficulty finding a guarantor, one alternative is to try to negotiate other forms of security with the tenant and the real estate agency.
Whether through insurance, security deposit , letter of guarantee… there are several possibilities.
Analyze your situation and see which is the best option, which does not generate greater financial impacts and greater bureaucracy for signing the rental contract.
Conclusion
Choosing a guarantor is not an easy task, is it?
As laborious as it may be, a guarantor is still an available option and one that some tenants seek out. Especially since it also offers financial security to the property owner.
But before you make that decision, remember all the tips we gave you.
Check whether the potential guarantor really has the financial means to serve as collateral. And, most importantly, whether he or she is the best option for you.
On our blog , we have many other articles about property rentals. Continue your visit there and be sure to share this text on social media.