Canceling Homeowner's Insurance After Closing: What You Need to Know

Canceling your homeowner's insurance may violate the terms of your loan agreement.

When buying or selling a house, there are a number of home expenses to either sign up for or cancel. This includes utility services and homeowner's insurance. Having homeowner's insurance is not always a choice for home buyers, especially when they use the services of a lender to purchase the property.

Escrow Process

During an escrow process when purchasing a house, the escrow company typically holds funds, such as the buyer's down payment, while the title company searches the title on the property to determine the seller's ability to convey title to the buyer. The buyer normally has an inspection period during the escrow process, where he inspects the property. This is the time for the buyer to verify the property is insurable. It is possible for some properties to be uninsurable or difficult to insure, such as one located in a high-risk fire area. Escrow closes when the escrow service receives the buyer's funds for the seller and submits the required paperwork to convey the title from the seller to the buyer.

Lender Requirements

Lenders normally require that a borrower carry homeowner's insurance to protect the lender's interests. Sometimes home buyers pay homeowner's insurance through an escrow account, where the borrower pays a little extra each month in addition to the basic house payment. Those funds typically go to pay property tax and homeowner insurance. Instead of the homeowner sending the funds to the insurance company and tax collector, the lender sends the funds from the escrow account. It is possible for a homeowner to cancel the escrow account and pay the fees directly. Yet, some lenders require an escrow account and, by the terms of the loan, do not allow the borrower to cancel it.

Buying a Home

A home buyer who pays cash for the property is not typically obligated to carry homeowner's insurance, which means she is able to cancel the insurance whenever she wants. Home buyers using a lender are normally required to have homeowner's insurance in place for the day the property title conveys to the buyer. If the homeowner opts to cancel the policy after the close of escrow, without having another policy in place, the lender can take action against the borrower, such as obtaining the homeowner's insurance and billing the homeowner.

Selling a Home

When selling your house, you can cancel your homeowner's insurance after escrow closes. Normally the seller will contact the insurance company and let them know when escrow is to close. Yet, if the close of escrow delays, it is important for the seller to have insurance in place for as long as he is responsible for the property.