For purchases, a borrower must have what duration of prepaid insurance policy to close?

For purchases, a borrower must have what duration of prepaid insurance policy to close?

• A. Six months prepaid policy
• B. One year prepaid policy
• C. Two years prepaid policy
• D. No prepayment required

Answer: (B)

Coverage must be in force at closing and the premium for the first year should be prepaid. Lenders require a full year of homeowners insurance prepaid so the policy is effective from day one and to seed the escrow account that will pay the next 12 months of premiums (and taxes) without a lapse. This protects the lender’s security and ensures the borrower won’t have a gap in coverage right after closing. Six months prepaid could leave a gap in coverage before the first year is up, and two years prepaid is more than what's typically required. No prepayment would delay coverage until renewal, which could create a risky lapse in protection.

Coverage must be in force at closing and the premium for the first year should be prepaid. Lenders require a full year of homeowners insurance prepaid so the policy is effective from day one and to seed the escrow account that will pay the next 12 months of premiums (and taxes) without a lapse. This protects the lender’s security and ensures the borrower won’t have a gap in coverage right after closing.

Six months prepaid could leave a gap in coverage before the first year is up, and two years prepaid is more than what's typically required. No prepayment would delay coverage until renewal, which could create a risky lapse in protection.