DEFINITION of Rent Guarantee Insurance
A risk-management product that protects landlords against loss if a renter defaults. This insurance is bought by the tenant and pays the monthly rent for a set period of time if the covered tenant stops making rent payments.
BREAKING DOWN Rent Guarantee Insurance
Much like private mortgage insurance (PMI), rent guarantee insurance protects the landlord – not the tenant – but the tenant pays the premium. If the tenant stops paying rent, the insurance carrier, acting as guarantor, covers the rent for the period of time specified in the contract. This type of insurance has existed in the United Kingdom for some time, but is now being sold in the U.S.
Tenants who stop paying remain liable for the rent owed and any legal fees. The guarantor can start legal proceedings against a delinquent tenant, including eviction and reporting to credit agencies.
Rent guarantee insurance comes at a considerable cost – normally 5% to 7% of the annual rent payments. This is about equivalent to one month of rent, paid in one lump-sum payment prior to the signing of the lease.
Here's why someone might need this product: With rents very high in many cities, a tenant may not have the income, job history or credit score required by a landlord to receive a lease. In those cases, the landlord may demand that someone else cosign the lease or that the tenant have a guarantor who will step in. This coverage is in place of that cosigner or guarantor. A prospective tenant who doesn't have a cosigner or a guarantor who meets the landlord’s requirements may find that the landlord will accept rent guarantee insurance instead.