Translation - based on this information I not only can not obtain a loan through this lender because they will not loan because it is not "move-in" ready but I can not even use my small reserves as the downpayment required.I'm now officially stuck...

Yes most mortgage applications have an area that you enter in rental incomeYou will typically need 6 months of reserves for every property you own unless it's a commercial loan or equity loan/line

You will probably need 6 months of reserve funds for all of the properties.

Renters insurance is actually reserved for the tenant that will be occupying your property to cover their personal belongings. 

BUT to be really safe I would strongly suggest that he have the 2 months reserves.

If they end fractional reserve banking and standardize lending, we would see much more stability in prices.

We'd have to do an FHA at 3.5%, which is still a little scary to leave so little in reserve fund to me.  

If a person does not have enough money for the "reserve fund" requirement for a hard money loan, what other options are available out there?

Like anything else the little guys probably had to take some bigger risks and make some bolder projections, while not having all of the research and back office tools that the larger shops have in order to compete, now unlike the big guys they don't have the cash reserves to cover the overhead. 

Build up those cash reserves.