Hard Money Lender Questions

[Account Closed]

Hi.

I'm working on my first official rehab project, therefore, I have not  established private money lenders at this point.  I have purchased the property with my own money and am talking with a hard money lender to finance the rehab portion and some holding costs for the project.  They will lend me the full purchase price of the property at 16% interest only.

Is it normal for a hard money lender to be the Mortgagee/Loss Payee on a homeowner's insurance  policy?

Also, once the property becomes livable, I plan to live in it until it sells - with the assumption that the market I am in, plus winter months, will take a few months to sell (unless I get lucky and it  sells rapidly).  Is this typically a problem with a hard money lender who will have the first position lien on the property?

Thank you,

Bryan

[Jeff S.]

It's completely normal for any lender to be listed as the Mortgagee/Loss Payee on your insurance policy, @Account Closed. If the house burns down, the insurance will first pay the mortgagee first. If they weren't listed, you would receive the money with a loan against non-existent collateral and the lender doesn't want to have to chase you for payment.

As a side note, a standard homeowners policy will not protect a flip. You need a vacant dwelling policy with builder's risk, which only a handful of insurance companies provide. State Farm and Farmers will sell you any homeowners policy you ask for, they don't care, but will not pay if the home is vacant and under construction as you state. Your lender should know this. It's possible neither of you are protected right now.

"Just be careful on who you tell about living there. I'm pretty sure HML don't/can't do primary residences."

A wise lender will ask you to establish the use of the money up front and in writing. Lying, misstating, being "careful," or whatever you want to call it, is fraud. Some HML's are actually licensed to make consumer purpose loans if you want to live in the house. Most are not however, and can only make business purpose loans (such as for flips that you intend to sell when complete). You must disclose you want to live in the house up front. Don't get off on the wrong foot here with bad advice, Bryan. In this case, a 203k loan from a bank might have been be your cheapest option.