Who Pays Homeowners Insurance at Closing?

Homeownership brings with it a range of responsibilities, including protecting one’s investment. Homeowners insurance serves as a financial safeguard, providing coverage against potential damage or loss to the property and personal belongings, as well as liability protection. This coverage is a standard requirement for most mortgage lenders, as it protects their financial interest in the property throughout the loan term. Without adequate insurance, both the homeowner and the lender face significant financial risk from unforeseen events.

Buyer’s Responsibility for Initial Premium

The buyer is responsible for paying the initial homeowners insurance premium at closing. Mortgage lenders mandate this insurance to protect their collateral and investment, ensuring the property can be repaired or rebuilt after a covered loss. The first full year’s premium is typically paid upfront, either before or at closing.

Before closing, the buyer must select an insurance policy that meets the lender’s coverage requirements, often including sufficient dwelling coverage to rebuild the home. Proof of this coverage, usually an insurance binder or declarations page, is then provided to the mortgage lender and title company. This documentation confirms the property will be insured from the moment ownership transfers. Providing this proof in advance helps prevent delays.

Funding Through Escrow Accounts

Many mortgage lenders establish an escrow account at closing to manage ongoing property-related expenses, including homeowners insurance premiums and property taxes. An escrow account functions as a dedicated savings account held by the lender, where a portion of the homeowner’s monthly mortgage payment is deposited. This arrangement simplifies the payment process for the homeowner by consolidating multiple expenses into a single monthly payment.

At closing, an initial deposit is often collected to fund this escrow account, serving as a reserve or “cushion.” This initial deposit typically covers a few months’ worth of insurance and tax payments to ensure sufficient funds are available when bills become due. After closing, the lender withdraws the annual homeowners insurance premium from this account when it is due, ensuring timely payment directly to the insurance provider. If insurance costs change, the lender adjusts the monthly escrow payment accordingly to maintain adequate funds.

Closing Day Payment Procedures

On the closing day, the costs associated with homeowners insurance and initial escrow deposits are itemized on the Closing Disclosure (CD), a standardized form provided to the buyer. The Closing Disclosure details all financial transactions related to the home purchase, including loan costs, prepaid items, and other expenses. The first year’s homeowners insurance premium and any required initial escrow deposits are presented as part of the total “cash to close” amount due from the buyer.

The title company or closing attorney collects these funds from the buyer at the closing table. The first year’s insurance premium is typically sent directly to the insurance company, while the initial escrow deposit is transferred to the lender’s designated escrow account. This ensures the insurance coverage is active and the escrow account is properly funded from the effective date of ownership.