When a Homeowner Needs Renter’s Insurance

iStock_000008911414XSmallThis topic might seem a bit strange, but there are actually situations in which a homeowner would need renter’s insurance. However, before we get started, it’s important to remember that renter’s insurance is still a form of home insurance. It’s called the HO-4 policy form, which is more commonly referred to as a tenant’s or renter’s form. Along with other “HO” (which stands for homeowner) forms, the renter’s policy is within the broader category of homeowners insurance. If you are used to owning your home, it might not occur to you when it’s time to switch policies as your needs change from being an owner to a renter.

The most common occurrence for homeowners who need to switch to a renter’s policy is upon the sale of their home. In a common scenario, homeowners who sell their homes often need to stay in it after the close of escrow. This can often be because their new home they plan to move to is not yet ready. As part of the sales transaction, the selling party asks to rent the home from the buyers after the ownership of the home has legally transferred.

You might ask why this is necessary instead of just selling the house and closing escrow at a more appropriate time. Unfortunately, it’s not always possible to predict exactly when a new house will be ready for move-in. Also, sellers don’t want to lose out on a good opportunity to sell and buyers don’t want to wait for the house to come back on the market. It’s usually a good idea to avoid a long escrow as it introduces more time into the equation where people can change their minds and have the deal fall apart. If the buyers do not immediately need to move into the home, a sale and subsequent leaseback can be a win-win situation.

If you find yourself in the scenario of having just sold your house and needing to lease it back from the seller for a few months, what do you do? You don’t need to move or change anything as you’re still living in what used to be your home. However, one big change is the fact that you are now a tenant and not the owner! That’s right, you are now a tenant in what feels like your own home. Actually, it’s no longer your home because it belongs to the buyer of your home – your new landlord! This change is very important from an insurance perspective as it affects the policy you purchase.

Once the escrow closes and legal ownership of the home transfers to the new owners, you will need to have the correct insurance policy in place. It’s best to have this clarified in your lease agreement, which can be part of the original sales contract. Traditionally, tenants don’t insure the dwelling as they have no legal ownership of it. However, these seller leaseback situations are somewhat unique and, if your lease provides for it, you might be able to continue your existing home insurance policy for everyone’s benefit.

The more likely scenario is that the buyer of your former home will need to come up with separate insurance, especially if there is a mortgage lender involved. In that situation, you will need to change your home insurance policy to a renter’s policy. There’s no use in paying for coverage on the dwelling when you no longer own it and have no insurable interest. You will, however, need to continue insuring your personal property and personal liability.

While this may seem like a minor change, it’s actually quite substantial in that you are changing to a wholly different policy. You’re not actually just reducing a limit for dwelling on an existing policy. However, it’s not difficult to accomplish and you should be congratulating yourself on just having sold your home!

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