Many real estate investors who borrow hard money often are unaware of the types of insurance needed for hard money loans, including those for fix and flip projects. This article focuses on this specifically.
Hard money loans are a specific type of asset-based loan financing where a borrower receives funds secured by real property. Hard money loans issued by private investors or companies are the type of loans DFW Hard Money specializes in.
On the whole, hard money loans for real estate investments have few requirements and are completed with a relatively simple 5 step process. However, to protect their investment, hard money lenders require borrowers to insure the non-owner-occupied property for the loan’s life since these loans are primarily asset-based.
Hard Money Loans And The Insurance Needed
Here we address the types of insurance real estate investors most commonly need for fix and flip investments, rental and refinances, multi-family, and commercial property loans.
Builders Risk Policy – Fix and Flip Insurance
Fix and flip rehabs and construction loans require a builder’s risk policy. Simply put, the builder’s risk policy is construction insurance, typically covering the loan amount.
A builder’s fix and flip insurance risk policy protect the construction projects the property will undergo from any covered losses. Each policy can be unique and offer different coverages. However, covered losses usually include fire and weather-related events.
The most common events during building include electrical fires, lightning, or floods. When taking out a policy, reading the fine print is always important to fully understand what is and is not covered.
Additional insurance can be added for theft or vandalism. Depending on the area where you are building or rehabbing, the appropriate insurance coverage will have to be in place to protect you and the hard money lender.
What’s Not Covered In Standard Insurance Policies?
Most standard insurance policies do not cover vacant properties. Most other insurance policies do not offer builder risk coverage, which is why the lender requires a builder risk policy. Builder risk coverage on your vacant construction project gives you the protection and peace of mind you need from an unexpected loss. This construction insurance protects you and the lender’s investment.
Rental Property Insurance & Tenant Dwelling Policies
Rental properties require a landlord-tenant or tenant-dwelling policy. These policies are necessary for properties occupied by someone other than the owner.
Tenant dwelling policies usually limit the allowable number of days the property can remain vacant, so review your policy carefully. As with builder risk, the policy coverage varies from policy to policy.
If a property has a tenant in it for any amount of time, even one night, there must be a tenant dwelling policy in place, or any losses that occur will not be covered. For this reason, hard money lenders require that a tenant dwelling policy is in place if there is a seller leaseback on the property, where the seller is leasing back the house for a short period after the sale.
General Liability Insurance
General liability insurance is a good idea to have to protect yourself if someone is injured on your property and seeks to hold you responsible. General liability insurance can be included as a package policy with the other insurance you choose, or it may need to be purchased separately. Again, reading the fine print is key.
Homeowner Policy
A homeowner policy covers property that the owner is occupying. It covers losses and damages to an individual’s house and assets in the home. The homeowner policy usually covers interior damage, exterior damage, loss or damage of personal assets, and injury that arises while on the property. A homeowner policy does not cover a rental property or flip property. Most homeowner policies have a vacancy clause stating that the policy will be deemed canceled if the property is vacant beyond a specific time frame.
Understanding the different insurance types an investor may need or want and obtaining the correct policy for your property is vital to protecting your financial investment while satisfying the hard money lender’s insurance requirements.
Recap of Insurance Needed for Hard Money Loans
Always talk to your hard money lender to understand their requirements, and always read the fine print of your hard money loan carefully. If you’re unclear, we at DFW Hard Money are always here to help and bring over 20 years of hard money lending experience. To learn more about DFW Hard Money, call (817)200-7575 or complete a no-obligation application today.