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  🏠 DP1 vs. DP3 Insurance Policies in DSCR Loans – What Investors Need to Know

  Posted by Nadlan Group on April 16 at 22:02

  🏠 DP1 vs. DP3 Insurance Policies in DSCR Loans – What Investors Need to Know

  When securing a DSCR (Debt Service Coverage Ratio) loan for an investment property, one of the most important (and often misunderstood) components of the closing process is the insurance policy requirement.

  Two common types of landlord insurance used in real estate investment are DP1 and DP3 policies. In this article, we break down the difference between them, explain why some lenders may require one over the other, and outline the documentation needed for each policy.

  🔍 What is a DP1 Insurance Policy?

  DP1 (Dwelling Property 1) is the most basic form of rental property insurance. It offers named peril coverage, which means it only covers damage or loss resulting from specific events listed in the policy (e.g., fire, lightning, vandalism).

  Pros of DP1:

  • Lower cost

  • Simple coverage for vacant or low-risk rental properties

  Cons of DP1:

  • Limited protection (only covers listed perils)

  • Often excludes theft, water damage, or liability coverage

  • No “loss of rent” coverage unless explicitly added

  🔍 What is a DP3 Insurance Policy?

  DP3 (Dwelling Property 3) is the most comprehensive type of landlord insurance and is known as “all-risk” or “open peril” coverage. It insures against all perils except those specifically excluded in the policy.

  Pros of DP3:

  • Broader coverage (includes theft, water damage, liability, etc.)

  • Includes loss of rent (typically 12 months)

  • Preferred by many lenders and investors

  Cons of DP3:

  • Higher premiums

  • May not be available for vacant properties or properties in poor condition

  🏦 Insurance Requirements in DSCR Loans

  When applying for a DSCR loan, lenders care less about whether the insurance is DP1 or DP3, and more about whether it meets certain coverage criteria. Below is a side-by-side comparison of what each typically includes and how it aligns with lender expectations:

  ✅ Coverage Requirements Comparison: DP1 vs. DP3

  1. Coverage Amount

  • DP1: Must be equal to or greater than the loan amount

  • DP3: Must be equal to or greater than the loan amount

  2. Mortgagee Clause & Loan Number

  • DP1: Must be included

  • DP3: Must be included

  3. Loss of Rent Coverage (minimum 6 months)

  • DP1: Not included by default – must be added manually

  • DP3: Usually included by default

  4. Replacement Cost Endorsement

  • DP1: Optional; some lenders may waive this

  • DP3: Typically included

  5. Type of Coverage

  • DP1: Covers only “named perils” (e.g. fire, vandalism, etc.)

  • DP3: Covers all risks except specifically excluded ones (open-peril coverage)

  In summary:

  • DP1 may be acceptable for lenders that are only concerned with basic risk coverage, especially if loss of rent is added.

  • DP3 is more comprehensive and generally preferred when the lender requires full protection, especially for occupied or income-producing properties.

  📄 Required Insurance Documents for DSCR Loan Approval

  Whether submitting a DP1 or DP3 policy, the following documents are typically required by DSCR lenders:

  Required for Both DP1 and DP3:

  • Insurance Binder or Declaration Page

  • Coverage equal to or greater than the loan amount

  • 6 months of rent loss coverage

  • Mortgagee clause and loan number listed correctly

  • Insurance agent contact information

  Optional / Recommended:

  • Replacement Cost Endorsement

  • Proof of premium payment or invoice

  • Full policy document (if requested by the underwriter)

  🧠 Final Thoughts: Which Should You Choose?

  • If the lender does not require a specific policy type and you’re looking to reduce costs, a DP1 policy (with rent loss added) may be sufficient.

  • If the lender prefers more comprehensive coverage, or the property is tenant-occupied, then a DP3 policy is usually the best fit.

  Always confirm with your loan officer or insurance provider before binding a policy. At Nadlan Capital Group, we work directly with both borrowers and agents to ensure smooth and compliant closings.

  📞 Need Help?

  If you’re unsure which insurance policy is right for your DSCR loan or want us to review your insurance binder, we’re happy to help.

  Contact us at:
  🌐 http://www.NadlanCapitalGroup.com

  

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