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.

Background I had been working with a client for over a year and a half to plan for the refinance of his multifamily property. He originally purchased the asset with a bridge loan, and it was time to transition into permanent financing. The Analysis A s part of our underwriting process, I put together a detailed sources and uses chart. We concluded that a new loan would not only pay off the existing bridge loan, but also allow him to pull out equity to pay off several other unrelated loans. Everything penciled out cleanly—on paper, we were ready. The Surprise at Closing Prior to closing, we hit an unexpected snag: the equity cash-out was going to be $70,000 less than anticipated. What happened? The loan was through Fannie Mae—which was the best execution available. It offered the highest loan proceeds, lowest interest rate, and longest amortization. However, Fannie Mae requires a Property Condition Assessment (PCA) , which evaluates the physical condition of the property and identifies any “immediate repairs”  that need to be addressed in the near term (typically within 1–12 months). In our case, two major items flagged by the PCA were: Parking lot repairs Foundation work To ensure these repairs are completed, Fannie Mae holds back a portion of the loan proceeds in a repair escrow. Once the borrower completes the repairs, any unused funds may be released. This holdback structure incentivizes borrowers to make repairs quickly and cost-effectively. The Lesson Learned I was already familiar with this requirement from Fannie Mae. What I could have done better was prepare the client  for this possibility. While the exact amount of the required repair escrow is unknowable until the PCA is completed, I could have better managed expectations. The property was in good shape—fully renovated units, well-maintained overall—but even properties in good condition can require immediate repairs by the PCA. What I’ll Do Differently Going forward, I plan to include a placeholder line in the sources and uses chart  titled “Immediate Repair Budget” with a value of $0. I'll explain to the client that: This amount is currently unknown It could end up being $0— but probably not They should expect that something might be flagged, and that there may be a corresponding holdback This simple adjustment will help clients be more emotionally and financially prepared for last-minute adjustments at closing. Final Note: Context Matters Bridge lenders also typically require a PCA and identify immediate repairs. But since borrowers using bridge loans are usually planning value-add improvements anyway, these repairs often overlap with the borrower’s renovation budget. As a result, the immediate repair holdback doesn’t come as a surprise—it’s often already baked into their strategy. With a refinance, however, the borrower already owns the property and may not believe anything needs to be repaired at their property. If they weren’t planning to make additional improvements, a lender-required repair holdback can feel like an unexpected cost. That’s where proactive expectation-setting becomes helpful.