The Importance of Insurance Requirements for Private Lender Loans: Protecting Your Investment
When you're working with a private lender, you may find that their insurance requirements are more stringent than you expected. It’s not uncommon for lenders to require a dwelling policy that covers 100% replacement cost, general liability insurance in the range of $500,000 to $1 million or more, flood insurance, loss of rental income coverage, builder’s risk insurance, and in some cases, a vacant renovation policy instead of a landlord policy. Additionally, lenders may require that insurance premiums are paid in full for the next 12 months.
While this level of detail may seem tedious and push some borrowers toward lenders with more lenient requirements, these strict guidelines are actually a green flag for borrowers. Here's why:
Lender's Interest Aligns with Your Success
A private lender who enforces thorough insurance requirements demonstrates that they are serious about the success of your project. If a lender doesn't care about what happens to the property in the event of a disaster, it likely means they are only interested in making quick origination fees and walking away. Strict lenders, on the other hand, are invested in ensuring that both you and the project succeed.
Protection for Both Lender and Borrower
While it’s true that these insurance policies protect the lender’s capital, they also safeguard the borrower’s investment. Should an unexpected event occur—such as a fire, flood, or theft—the right insurance ensures that the borrower is not financially crippled. For first-time fix-and-flip investors, navigating the complexities of insurance can be tricky, and a good lender will guide you in selecting the right coverage.
Avoiding Costly Insurance Mistakes
A common issue we’ve encountered is when insurance agents unknowingly recommend the wrong policy. For example, some agents might suggest a standard landlord policy when the property is vacant and undergoing renovations. However, if a property is vacant for months during renovations, a landlord policy won’t provide the necessary coverage. If damage occurs, the insurance company may refuse to cover the loss, leaving the borrower financially exposed.
Due Diligence Reflects Strong Underwriting
A lender that underwrites your deal with precision and requires strict insurance not only shows that they are diligent but also that they believe in your project’s potential for success. When a lender carefully evaluates your strategy and plan, their attention to detail serves as a strong indicator that your project is likely to succeed.
A Long-Term Capital Partner
Ultimately, a good private lender isn't just looking to do a single loan; they want to become your long-term capital partner. Their goal is to see you succeed in one project after another, building your real estate portfolio. A lender who demands thorough insurance coverage is a lender who wants to ensure you are protected and that your investment strategy is sustainable for the long haul.