Insurance Requirements for Hard Money Borrowers
When you’re financing an investment property with a hard money loan, it’s important to understand the insurance requirements involved. These requirements are put in place to protect both you and your lender from unexpected risks. Today, we’re reviewing why hard money lenders have insurance requirements, the type of insurance you need, and more.
Contents of This Article:
- Why Do Hard Money Lenders Have Insurance Requirements
- What Type of Insurance Do You Need as a Borrower?
- What If You Don’t Have the Right Insurance?
- How to Get the Right Insurance Coverage
- Work With a Trusted Lender Near You
Why Do Hard Money Lenders Have Insurance Requirements?
Hard money lenders, like most lenders, require insurance when you get a loan. For instance, if the property gets damaged by fire, storms, or vandalism, having the proper insurance helps protect you and your lender’s financial interest.
Since hard money real estate loans in Maryland are asset-based and secured by the investment property itself, lenders need to ensure the collateral is protected at all times. With that, insurance requirements also help cover risks related to your renovations, potential vacancies, or liability issues. After all, many hard money projects may involve vacant, distressed, or under-construction properties, which generally carry more risk than occupied or move-in-ready homes.
That said, without the proper insurance coverage for your investment, a major loss could leave you and your lender financially exposed, delay your projects, or even lead to default.
What Type of Insurance Do You Need as a Borrower?
As a hard money borrower, your lender will likely require several types of insurance to protect the property throughout the loan term. These may include:
- Property Insurance (Hazard Insurance)
- Builder’s Risk Insurance
- General Liability Insurance
- Vacant Property Insurance
- Workman’s Comp Insurance
- Lender’s Loss Payee Clause
Property Insurance (Hazard Insurance)
Property insurance protects the investment against common hazards like fire, theft, vandalism, and storm damage. This is the most basic and essential coverage, and nearly all hard money lenders require it. That said, this policy must typically be active from the day of closing and maintained throughout the loan term.
Builder’s Risk Insurance
If you’re renovating or building on the property, builder’s risk insurance is generally required. It covers materials, tools, and the structure itself during the construction process. This type of insurance is especially important for fix-and-flip investors to protect their investment during renovations.
General Liability Insurance
General liability insurance protects against claims related to bodily injury or property damage that may occur on the property. For instance, if a contractor or visitor is injured on-site, this coverage helps handle medical costs or legal fees. It’s a standard requirement for properties undergoing renovations.
Vacant Property Insurance
Most standard insurance policies don’t cover homes that sit empty for extended periods. That said, vacant property insurance fills the gap by covering risks such as vandalism, theft, or weather damage while the home is unoccupied. It’s particularly important for investors holding or rehabbing a property before resale or rental.
Workman’s Comp Insurance
If you’re renovating a property and hiring workers or managing a construction crew, you’ll probably need workers’ compensation insurance. This protects against injury claims from laborers on the job site. However, if you hire a licensed general contractor, they’ll likely provide their own coverage, so this isn’t always a requirement.
Lender’s Loss Payee Clause
This clause isn’t a separate policy, but it must be included in your insurance documents. It names the lender as a beneficiary in case of damage or loss, and ensures they’re compensated first if a claim is paid out. That said, without this clause, your lender’s financial interest may be at risk in the event of a disaster.
What If You Don’t Have the Right Insurance?
Not having the right insurance coverage can put your project and your lender at risk. Generally, a lender will not release funds for a project without the proper insurance in place for several reasons. For instance, if your property is damaged or vandalized, or if someone is injured on-site during renovations, you could face significant out-of-pocket costs.
Additionally, not meeting your insurance obligations could lead to default, even if you’re making payments on time. Your lender may stop releasing draws, require you to pay the loan off immediately, or take legal action to protect their investment. In more severe cases, you could lose the property entirely through foreclosure.
So, to avoid any of these risks, it’s best to secure the right insurance policies before closing and keep them active until the project is done and your loan is paid off.
How to Get the Right Insurance Coverage
Getting the right insurance for a hard money project isn’t always as simple as buying a standard homeowner’s policy. After all, investment properties–especially those under renovation—have risks that require specialized coverage.
Here are a few tips to ensure you’re properly insured for the length of your hard money loan.
- Work With an Experienced Agent- You’ll want to find an agent who understands real estate investing and fix-and-flip projects so you can get the right policy for your situation.
- Get Quotes Early On- Don’t wait until closing to find insurance. You’ll want to start early to avoid potential project delays and ensure your coverage meets lender requirements.
- Confirm Your Coverage With Your Lender- Before finalizing your policy, it wouldn’t hurt to check with your lender to confirm the policy limits, types of coverage, and documentation they require.
- Keep Your Policies Active- It’s important to monitor your coverage during your fix-and-flip project to avoid any funding delays or potential loan default.
Work With a Trusted Lender Near You
Meeting your insurance requirements is a vital part of the investment process. Not only does it help protect you and your investment, but it also protects your lenders’ best interests and helps to keep your project on track.
That said, if you’re looking for a reliable lender to help you fund your next investment, look no further than Maryland Hard Money Lenders. Our team of loan professionals can help you get funded quickly and efficiently. Learn more about our lending process or fill out our loan application today.
