About real estate: Renting home to tenants raises key insurance issues

Property owners often decide to rent their home out to tenants rather than putting it up for sale. Failing to check with their insurer first could leave them financially unprotected.

Q. We are buying a new home in another city, but we’re planning to rent our current one to tenants. Do we need to notify our insurance company about our plans, or will the property simply remain covered under our current homeowners policy?

A. It’s always best, and often required, that you let your insurer know that you’re planning to rent out your home to tenants — whether it’s for a weekend, a month or for a longer period of time. Failing to do so could leave you unprotected if the home is damaged during the rental period or the tenant is injured while living there.

Some insurance companies will allow policyholders to occasionally rent their home out for short periods of time without demanding a change (or charging extra fees) to retain full insurance protection. But if the rental will last for more than a month or two, most insurers will insist that the property owner get a more comprehensive “landlord” or “rental-dwelling” policy. They are also required of owners who rent out a vacation home on a regular basis.

Landlord policies generally cost about 25 percent more than a standard homeowners policy because landlords need more protection than a typical homeowner, said Jeanne Salvatore, a vice president at the nonprofit Insurance Information Institute (www.iii.org) in New York. They cover damage caused by the usual list of perils, such as fire or wind. But they also include coverage for any personal property that you might leave behind for the tenant’s use, whether it’s an appliance or lawn mower.

Importantly, a landlord policy also includes liability coverage that will protect you if a tenant or a guest gets hurt on the property. “It could reimburse you for most or all of your legal fees that might result if the tenant makes an injury claim, plus any medical-related reimbursements or awards that a judge might give to the renter,” Salvatore said.

Most landlord policies even provide coverage for loss of rental income if you aren’t able to rent out the property while it is being repaired or rebuilt due to damage from a covered loss, she added. Call your insurance representative for more information.

Q. Is a legal “judgment” the same thing as a “judgment lien”?

A. No. A judgment is basically a court decree that says one person or company owes another one money. A judgment lien is a subsequent claim against the debtor’s real estate or other property that the winner of a court case sometimes must file to collect the debt.

To illustrate, say you won a lawsuit against John Defendant, and the court issued a $5,000 judgment in your favor. If John refused to pay, you could use the court decree to file a lien against his home or other property. The lien would prevent John from selling or refinancing without first settling his debt to you.

Q. We were preapproved for a mortgage two weeks ago, but now we found a much better deal from a different bank. Are we obligated to stick with the first lender because it already preapproved us for the loan, or can we cancel the loan arrangement and go with the second lender to save money? Also, if we can cancel with the first bank, can we demand a refund of the $400 or so that we paid it for a credit check and other upfront fees?

A. You can nix the deal with the first lender to get the “better deal” you describe with the second, but the first bank isn’t legally obligated to refund the $400 that you paid.

Smart homebuyers always get preapproved for a mortgage, in part because it gives them a realistic idea of how much they can borrow. The amount is based on several factors, including the applicant’s credit history and score, verified income and expenses.

Getting preapproved for a mortgage by a bank is always better than merely getting “prequalified” for a loan by a local real estate agent or an Internet site. Many agents and popular sites offer free prequalifications, but they are little more than a ballpark, nonbinding estimate of how much can be borrowed.

Although you can’t get a refund of the $400 you already paid to the first lender, I’m sure that you’ll quickly recoup the money by using the second bank that is offering much better financial terms.

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© 2013, Cowles Syndicate Inc.