How Insurance Costs Can Shrink Your Loan Proceeds

Henry Holt
Jun 22, 2025
3 min read

Updated: Jun 24, 2025

Background

Lenders underwrite loans based on net operating income (NOI), and one of the largest line items affecting NOI is insurance expense. If insurance comes in higher than expected, your NOI drops—and so does your loan size.

Lenders typically fall into two categories:

Non-recourse lenders (e.g. agency, CMBS, debt funds): Can’t pursue the borrower personally, so they focus heavily on the property’s financials and risks.
Full-recourse lenders (e.g. banks): Can pursue both the property and the borrower personally (guarantor), so they underwrite the borrower more deeply than the property.

The difference really shows up in how insurance costs are treated during underwriting.

How Insurance Estimate Change- and Why it Matters

When a lender begins underwriting, they typically use one of these three starting points to estimate insurance costs:

Seller’s historical expense from the trailing 12-month (T-12) financials
Lender’s market assumption, based on property type, location, and recent deals
Borrower’s underwritten estimate, if the borrower has already obtained quotes

But here’s the key:

🔁 These are just preliminary figures. The actual cost of insurance may only be known weeks into due diligence, after the borrower:

Receives loss runs (claims history)
Reviews lender insurance requirements
Gets formal quotes from insurance brokers

And if the final insurance premium is higher than the initial estimate, then NOI falls—and loan proceeds get cut.

Let's Look at the Math

Scenario A: Insurance Comes In as Expected

Gross Income: $600,000
Operating Expenses (Excl. Insurance): $350,000
Insurance Estimate (from T-12): $50,000
NOI = $600,000 - $350,000 - $50,000 = $200,000
Loan sizing at 1.25 DSCR, 6.5% interest, 30-year amortization:
Monthly debt = $200,000 ÷ 1.25 ÷ 12 = $13,333
Max loan = Payment of $13,333 supports a loan of ~$2,090,000

Scenario B: Insurance Comes in $20,000 Higher Than Expected

Insurance (final quote): $70,000
NOI = $600,000 - $350,000 - $70,000 = $180,000
Loan sizing at same DSCR/terms:
Monthly debt = $180,000 ÷ 1.25 ÷ 12 = $12,000
Max loan = Payment of $12,000 supports a loan of ~$1,880,000

🔻 Result: Loan proceeds drop by $210,000 due to a $20,000 increase in insurance. That’s a 10% swing in loan dollars over one line item.

How Non-Recourse Lenders Handle This

Non-recourse lenders almost always reconcile actual insurance costs before finalizing loan proceeds. That means:

If insurance ends up higher, they reduce the loan.
If it ends up lower (less common), they may increase it, subject to LTV/LTC limits.

Why are they strict? Because the property alone is the collateral—they need precision.

🧠 Borrower Tip:

Get ahead of this by working with your insurance broker early—ideally between LOI and PSA.

Provide early insurance quotes to your lender.
Underwrite conservatively to avoid surprises.
If costs come in lower, that’s a win. If higher, you’re already prepared.

Real-World Win

A borrower of mine was refinancing with Fannie Mae. We initially underwrote to a $20,000 insurance quote. But Fannie required much more coverage—quotes came in at $30,000.

That $10,000 increase would’ve reduced loan proceeds by almost $100,000.

We asked the lender for a recommended insurance broker who understood Fannie’s requirements. They connected us with someone who secured a compliant policy for $20,000/year.

✅ Result:

NOI went back up
Loan proceeds increased by nearly $120,000
We hit the borrower’s cash-out target
The deal closed cleanly

What About Full-Recourse Lenders?

Full-recourse lenders like banks typically don’t re-underwrite your final insurance premium—at least not formally.

They focus more on:

Guarantor’s personal tax returns
Global cash flow
Debt service across all owned properties
Liquidity and net worth

Because they can chase the borrower personally, they often accept more risk on the property-level financials—including insurance.

⚠️ Important:

Some bank lenders do check final insurance binders before closing, especially on large or complex deals. But it’s less common than with non-recourse lenders.

Key Takeaways:

Insurance can make or break your loan size.
Don’t trust the seller’s T-12 blindly—get your own quotes.
The earlier you bring your insurance agent into the process, the better.
If you're working with a non-recourse lender, expect a true-up of insurance costs before closing.
If you're working with a full-recourse lender, expect more underwriting on you—and possibly fewer questions about the insurance.