A guarantor letter is a legally binding document that commits a third-party cosigner to pay a future debt in case a person applying for credit defaults. The cosigner adds his creditworthiness and credentials to the transaction, buttressing the applicant’s position so the transaction can be completed. This type of letter can be used in any situation that relies on creditworthiness, but it is most often supplied as part of an application for a residential lease to personally guarantee that a tenant will pay the rent.
There are many situations where a person might not have the requisite standing to apply for a loan or extension of credit on his own merits. The person might have no credit history, such as a student, or a bad credit history, such as a person recovering from a long bout of unemployment. There are certain basic necessities that can only be obtained after a demonstration of a certain level of creditworthiness, such as a lease for housing. Other obligations that arise from time to time, such as a student loan or a car loan, may also require certain credentials that can be lacking in an individual at particular times in his life.
One way to obtain credit when a person’s credentials are lacking is to use a cosigner. A cosigner provides a personal guarantee for the transaction, promising to pay any debt if the original party defaults. For the party extending the credit, this is a win-win proposition. It gives the creditor a second person to pursue if anything goes wrong. A cosigner legally stands in the shoes of the debtor if he defaults, and is liable for the debt as if he had applied for credit and received the funds himself.
In a residential lease transaction, the cosigner is the guarantor of the lease. His promise to pay is typically expressed through a guarantor letter. The letter can be prepared by either the landlord or the cosigner and can be formal or informal, as long as the letter states the terms, acknowledges the co-signer’s obligation to pay, and is executed properly. The more sophisticated the landlord, however, the more likely it is that he will want to control the paperwork.
A sophisticated rental process will require the cosigner to complete an application and sign a guarantor letter that is prepared by the landlord’s attorney. The application will typically request personal information and specifics on employment and income. It will look very much like a formal contract, and contain all of the binding terms and require the cosigner’s signature in front of a notary.