In short, the insurance company does notify your lender that you took out a landlord insurance policy but this should not create an issue and your lender does not require you to refinance your mortgage. As long as you lived in the home for at least a year after your mortgage closed and you were truthful and accurate when you submitted your loan application, changing from a homeowners insurance policy to a rental property insurance policy is a non-issue.
First, mortgage lenders require that you obtain a certain level of insurance for your property. This protects the lender in the unfortunate event your property is destroyed or seriously damaged. For example, if your home is destroyed by a fire and you decide to walk away from the property, the lender can submit an insurance claim to make sure they recover their outstanding mortgage balance.
If you fail to maintain the required insurance coverage, your lender can put your mortgage into default. This is why lenders review your homeowners insurance policy every year. They want to make sure that you have the proper coverage and are in compliance with the terms of your loan.
Because your lender reviews your insurance policy annually, they learn if your type of policy or coverage levels have changed. Through this process, the lender learns if you have switched from a standard homeowners insurance policy to a landlord or rental property policy.
As long as you maintain sufficient insurance coverage to protect the lender against a significant loss, then changing your policy does not really matter to the lender. Simply put, the lender's primary focus is to make sure they can recover the money they lent you if something happens to your property.
We should emphasize that if you get a mortgage on your primary residence, lenders typically expect you to live in the home at least a year. So if you change your type of insurance policy within the first year after your mortgage closes, this may cause an issue with the lender.
Of course there are plenty of legitimate reasons people move out of their homes sooner than a year such as a job transfer or financial hardship but lenders do not want you to apply for an owner occupied mortgage on a property that you always planned to rent out. That is why it is important that you provide accurate information on your loan application.
Please note that the occupancy status of homes changes for many people after their mortgage closes. For example, after living in the property for several years some borrowers decide to move out and rent a home they purchased as their primary residence. On the other hand, some borrowers decide to move into a home they had financed with a investment property mortgage after initially renting the property.
In both scenarios we recommend that you update your insurance policy to make sure that you have the appropriate coverage. You can do this knowing that in neither case the lender requires you to refinance due to the change in property occupancy or insurance coverage.
In closing, you should feel comfortable renting out your home and changing your insurance policy without the risk that your lender will require you to refinance your mortgage.
"B7-3-02, General Property Insurance Coverage." Selling Guide: Fannie Mae Single Family. Fannie Mae, December 16 2014. Web.« Return to Q&A Home About the author