Do You Need Renter’s Insurance for Rent to Own?
Rent to own is a unique situation in which you're caught right in the middle of owning a home and renting it. You're certainly doing more than renting a property; however, you're not quite an owner yet.
So, when you're in the rent to own limbo, do you buy homeowners insurance or renters insurance?
Renters Insurance vs. Homeowners Insurance
Rent to own comes in two phases. In the first phase, you rent the property. Then, when you've saved up enough money for a down payment and have secured financing, you buy the property and own it.
From that logic, it makes sense to say that tenant-buyers in rent to own deals would pay for renters insurance up until they purchase a home. Then, they switch to homeowners insurance. This is most likely the case for tenant-buyers in the midst of rent to own deals.
Why Purchase Renters Insurance?
If a natural disaster, robbery, etc. damages the property you're living in, the seller's homeowners insurance policy will cover the cost of the damage to the home, but it won't cover your damaged property inside.
When you buy renters insurance, it covers anything stolen or damaged inside the house during a flood, fire, etc. It can also cover the medical expenses of someone suing you for getting injured on your property.
Nevertheless, in some situations, the tenant-buyer in the rent to own deal purchases homeowners insurance instead of renters insurance. It's just less common.
Why Purchase Homeowners Insurance?
Homeowners insurance is more expensive than renters insurance; therefore, you don’t want to purchase it if what it covers doesn’t fall into your realm of responsibility.
There's a lot of freedom in constructing a rent to own deal. Every part of the deal is negotiable. That being said, your contract can stipulate that it is your responsibility to take care of the structure of the home.
That would mean that you are responsible for any damage the home endures while you are living in it. As part of the limbo period between owning the home and renting it, the seller could request this stipulation in the contract.
In this scenario, the seller has likely paid off the mortgage on the property and is no longer required to have homeowners insurance. Therefore, the seller is giving you responsibility for the home.
You have the option to purchase homeowners insurance, but not the obligation. You will never legally have to purchase renters or homeowners insurance, unlike how you need to purchase car insurance. However, if a flood, fire, earthquake, etc. damages the home, it will be your responsibility to pay for the damages.
Homeowners insurance would cover the cost of those damages and damages to the property you have inside.
Purchasing Homeowners or Renters Insurance
Renters insurance is a lot cheaper than homeowners insurance is primarily because the insurance company is covering significantly less. Homeowners policies cover the whole unit. Renters policies cover the items inside and mistakes the renter makes that damage the property.
Before you purchase either, read the fine print on the contract to make sure you're covered for likely damages in your area. For example, many policies do not cover floods. It's important to pick a policy that covers issues that are more likely to occur. Additionally, check out of pocket maximums for the policy that requires the smallest contribution from you.
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