Insurance FAQ
Everything you need to know about property insurance for your investment loan—and why coverage type matters more than you might think.
The difference between ACV and Replacement Cost can mean tens of thousands of dollars when you file a claim.
Pays the depreciated value of damaged property—what it's "worth today" after accounting for age, wear, and condition.
A 15-year-old roof doesn't pay out enough to install a new one. You cover the gap out of pocket.
Pays the full cost to repair or replace with materials of similar kind and quality at today's prices.
Age doesn't matter. A 40-year-old property gets full repair coverage, same as a new build.
Insurance companies calculate depreciation based on the expected useful life of each component. Common depreciation schedules:
- Roof (asphalt shingles): 20-25 year life → 4-5% depreciation per year
- HVAC systems: 15-20 year life → 5-7% per year
- Water heater: 10-12 year life → 8-10% per year
- Carpet/flooring: 10-15 year life → 7-10% per year
- Appliances: 10-15 year life → 7-10% per year
- Kitchen cabinets: 20-25 year life → 4-5% per year
In an older property, these depreciation percentages compound across multiple damaged items, creating significant gaps between what you receive and what repairs actually cost.
Co-insurance requires you to maintain coverage at a specified percentage (usually 80-100%) of the property's value. If you're underinsured, you become a "co-insurer" and must share in any loss—even partial claims.
Example: Property worth $500,000 with 80% co-insurance requirement. You should carry $400,000 in coverage, but only have $300,000. You suffer a $100,000 loss.
Payout calculation: ($300K ÷ $400K) × $100K = $75,000
Your penalty: $25,000
Co-insurance policies are not acceptable on DSCR loans because the penalty mechanism creates unpredictable coverage gaps.
Understanding the real risks for both lenders and borrowers.
The property is the loan's security. If something happens and the property can't be fully restored, the lender's collateral loses value—and so does the loan's security.
It protects loan performance. When borrowers can't afford to cover a coverage gap, repairs stall. Stalled projects mean delayed exits, carrying costs, and increased default risk.
No surprise bills. A $50K claim pays out $50K—not $30K plus a $20K gap you didn't budget for.
Project continuity. Your flip or BRRRR stays on schedule even if disaster strikes. Reserves stay available for planned expenses, not emergencies.
Cash flow protection: Your operating reserves and rehab budgets stay intact for planned expenses—not diverted to cover insurance shortfalls.
Faster recovery: Full payouts mean you can get contractors started immediately, minimizing downtime and lost rental income.
No cash calls: You won't need to scramble for emergency capital during a crisis when lenders may be hesitant to extend additional credit.
Exit strategy intact: Whether you're flipping, refinancing, or holding long-term, your timeline stays on track because the property can be fully restored.
Yes—typically 10-15% less. On a $200/month policy, that's $25-30/month in savings, or roughly $300-360/year. One claim on a property with older components can leave you with a $10,000-$40,000 gap. The premium savings get wiped out instantly—and then some.
These scenarios show actual claim calculations using standard depreciation schedules and current repair costs.
Roof with 20-year expected life, 12 years old = 60% depreciated. $18,000 × 40% remaining value = $7,200 ACV payout.
Flooring (hardwood, carpet, tile), drywall, baseboards, HVAC components affected by water damage, any electrical that needs replacement. In a 1995 duplex, most of these components are significantly depreciated.
In every scenario above, replacement cost coverage would pay the full repair cost—$0 out of pocket. With ACV, you're betting that nothing major will happen to your property's older components. That's a risky bet on an investment property.
Different loan products have specific insurance requirements. Select your loan type below.
Condominiums require multiple layers of coverage. The HOA must have an adequate master insurance policy for the building, walls-in coverage for the interior, liability for common areas, and fidelity coverage for the HOA.
Flood insurance is required when properties are located in designated flood hazard areas.
Required if any part of the principal structure is in an SFHA—any flood zone starting with "A" or "V".
Also required for properties in Coastal Barrier Resources System (CBRS) or Otherwise Protected Areas (OPA).
NFIP: Standard policy issued under the National Flood Insurance Program.
Private: Acceptable if terms and coverage amount are at least equal to NFIP based on full policy review.
| Scenario | Flood Insurance |
|---|---|
| Any part of principal structure in SFHA | Required |
| Principal NOT in SFHA, but residential detached structure IS in SFHA | Required for detached structure |
| Principal NOT in SFHA, non-residential detached in SFHA | Not required |
| Detached structure NOT part of loan security | Not required |
For RTL properties in flood zones with loan amounts greater than $250,000, additional private market flood insurance is required beyond NFIP coverage, as allowed by law.
For rehabs underwritten using land value only (without consideration of existing structure) and Ground Up Construction, flood policies may defer binding until the first draw is to be completed.
Requirements:
- Insurance quote/pro-forma declaration page must be in the file
- Insurance must be in place prior to first draw
If at any time a hazard or flood policy is not in force with the servicer, "Forced Place" insurance will be applied. This coverage is typically much more expensive and may provide less favorable terms.
Use these tables and checklists to quickly verify your insurance meets requirements.
| DSCR Loans | $100,000 |
| Bridge & Rehab | $300,000 |
| Ground Up Construction | $1,000,000 |
Mortgagee Clause: Must name "American Heritage Lending LLC, ISAOA" with correct address
Cancellation: 30 days prior written notice to mortgagee required
Insurer: US domiciled, licensed in property state, meets Fannie Mae rating criteria
Named Insured: Must match names on title policy
Property Address: Must match title policy exactly
Forced Place: Applied automatically if policy lapses