HAZARD INSURANCE
PROPERTY INSURANCEFire and hazard insurance will protect against the most common cause of real property destruction. Property coverage prices and availability vary from state to state, region to region, and by type of property insured. The private mortgage lender should make sure that the property is insured for at least the value of the loan and that he is named as co insured. This will enable the lender to collect on the insurance proceeds directly from the insurance company should the property be damaged or destroyed. Further, the private mortgage investor should insist that the borrower obtain non cancelable insurance prepaid for one year. This means that when the borrower becomes short of money he won’t be able to cancel the insurance policy to obtain a refund or stop paying premiums.The most comprehensive policy, and hence most favorable from the viewpoint of the lender, is a comprehensive all risks policy for full replacement value. This policy will cover all perils except those that are specifically excluded and furthermore pay to repair or replace damage to the structure without regard to depreciation. However this type of coverage may be cost prohibitive or unavailable for certain types of rental property. More typically, the private mortgage lender will have to settle for a specific perils policy. These policies will name the specific perils for which the insurance will be in effect, usually fire, windstorm, some water damage, etc. It is important to note that no policy will pay for acts of war or flooding; if the property you’re lending on lies in a flood plain Federal Flood Insurance should be available, at an additional cost to the borrower, of course. In recent years we have gone away from insisting on full replacement cost insurance and accepting actual cash value. As long as the amount of insurance exceeds the amount of the loan. and as long as our loans are less than 70% of value, we should bear no additional risk by making this change; meanwhile the borrower may pay less for the insurance coverage and have an easier time obtaining coverage.
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