22. BRRRR – Lender Insurance Requirements
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
Like any loan, the lender will require you to have adequate insurance coverage for the property you seek to finance.
The following general insurance requirements for commercial property will apply to your loan. Please adhere to them when obtaining the required insurance for your loan and discuss any issues that may arise with your Loan Coordinator.
First, is the evidence of insurance. Prior to underwriting and loan approval, the insurance company must (1) have an “A-” rating or better in the latest edition of “Best’s Insurance Guide”, (2) be licensed to do business in the state in which the property is located, and (3) be licensed to transact the lines of insurance required.
Second, a Certificate of Insurance (for liability) and Evidence of Insurance (for hazard, flood, or windstorm) must be provided prior to closing.
Third, evidence of payment. You shall provide a paid invoice of insurance for full coverage prior to closing. If policy has been previously financed or paid in installments, the balance must be paid in full prior to or at closing. After closing, future insurance payments are escrowed and paid by the lender.
On every insurance policy financed, you must include a mortgagee clause to include the lender as an additional insured. There is a section of the insurance binder to include the lender’s information.
All evidence of insurance for the covered property must be provided to the lender on or before the closing of the mortgage.
Even though your current insurance coverage may be adequate for you at present, the lender will have their own minimum requirements for coverage. You can expect higher coverage requirements thereby slightly increasing your overall cost.
For example, the lender will require full replacement cost coverage. A replacement cost coverage policy helps pay to repair or replace a damaged property without deducting for depreciation. Basically, it is how much it would cost to reconstruct your home as it is now.
Liability coverage will average $1 million per occurrence/$2 million minimum general aggregate limit. This is the maximum amount of money an insurer will pay for all your covered losses during the policy period, typically one year.
For the deductible, it cannot exceed the greater of 1% or $5,000 per occurrence for portfolio and/or single asset mortgage loans but no more than $25,000. You must cover out of pocket for any damages up to deductible amount before your coverage takes effect.
Flood insurance may be required even though your property may not be in a flood zone. The appraiser will note if it is or not. If not, the lender may allow you to waive this coverage, but you need to request it. A separate windstorm policy is required if the property damage insurance excludes any type of wind-related events, If so, a separate windstorm insurance policy must be obtained. This will cover 100% of the full replacement cost of the property.
Is your head spinning yet? Don’t worry. The lender will provide a document with all insurance instructions to provide to your insurance carrier. Obtain an estimate from to provide to your lender. This estimate enables to lender to set up escrow in advance. We recommend you obtain an insurance estimate to provide during the initial underwriting review period. Don’t wait until your closing date to do this or your closing may be delayed.
It is in your best interest to understand the type of coverage required when financing through a commercial lender. Just remember, it is simply part of the process.
Do you have questions regarding financing your BRRRR properties? Please reach out to me. I am happy to assist.
Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC, Real Equity, Inc and REI Brokers. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,800 projects.
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