It is not that difficult for a lender to review this set-up and ask a few questions of the insurance company and be completely satisfied that their claim to first position lien holder and being fully insured is not compromised at all by the policy.   

@Bob Mueller Jr.Stinks you got put in a compromised position.

No skinny contract is going to have a 3. automatic release provision that could be followed with certainty under the circumstances... so that leaves 4. a court order.Time for everybody to compromise a bit to resolve this and/or start paying more legal bills.

@Ali Radhi If you are so desperate to start investing then you have to weight your options and compromise.

We decided a few years ago that buying anything in our market just was not going to provide an adequate return so instead we focused on sprucing up the portfolio, raising rents and improving tenants wherever possible.It is hard to stop buying, we still look but are not willing to compromise.

Might better define "undiserable" RE is like a sailboat, each requires compromises to manage.

You get the jest of what I am implying.It behooves you to try to work out a mutually agreeable compromise. 

Would this compromise the overall appraisal of the house if the outside portion isn’t finished 100%?

Absolutely no experience in construction but I'm assuming an obvious sag like that might mean a compromise in the support beams which would equal a costly fix.

Usually, you'll need to compromise on something in order to get started, and maybe trade up later to something more expensive.