Why Is My Mortgage Lender Requiring Flood Insurance?

Why do mortgage lenders require borrowers to buy flood insurance? Lenders want to protect their investments against one of the most common and costly natural disasters.

Is your lender requiring you to buy a flood insurance policy to protect your property? You’re not alone. Mortgage lenders sometimes require borrowers to buy flood insurance coverage so they can protect their investment in your property.

Flood damage can be more destructive than many people realize. Just a few inches of water in your home can cause tens of thousands of dollars in damage, according to the National Flood Insurance Program. Having some amount of coverage in place is crucial for homeowners, whether you’re in a flood zone on the flood maps maintained by the Federal Emergency Management Agency ( FEMA ) or simply don’t want to be caught unaware when a flood hits.

Unfortunately, real estate agents and mortgage lenders sometimes don’t tell customers that flood insurance is a mandatory purchase until the property is already in escrow. Many homeowners are also unaware that their property is at risk of flooding according to FEMA ’s flood zone determination, especially if the property doesn’t look like it would be in danger of flooding.

Here’s what you need to know about lender-required flood insurance.

Homeowners insurance won’t cover flood damage, but it will protect you against many other kinds of natural disasters, like fires. Investigate your options with Insurify.

Why Lenders Require Flood Insurance

Financial institutions can require you to buy adequate flood insurance because they want to protect their investment in your property. Many people think that the hazard insurance section of their homeowners insurance policy will cover damage from flooding, but they’re wrong. You need specifically named flood insurance, which is a separate insurance policy, to protect you against that type of destruction.

When you take out a mortgage loan, your home serves as collateral in case you stop making mortgage payments. If the property is financed, the mortgage lender may have a bigger stake in the property than you do. If your home is damaged by a flood and you end up abandoning the home and stop making payments, the lender stands to lose a lot of money. So, to lower their risk, lenders may have a flood insurance purchase requirement for your residential property.

Flood insurance will pay to repair or even rebuild your home if flooding damages or destroys it. You’ll only be responsible for paying the deductible instead of the tens of thousands of dollars it could cost to rebuild your home. That means you can keep your home, you’re more likely to keep making mortgage payments, and the result is positive for both sides.

Sometimes, flood insurance is optional, especially if you live in what’s usually considered a low-risk flood area. Depending on the type of loan, you may not have to have it, even if you’re in a high-risk flood area. However, you will be required to buy flood insurance if your home is in a high-risk flood zone (also known as a Special Flood Hazard Area ) and your mortgage is regulated or insured by the federal government (for example, if it’s backed by the USDA, VA, or FHA). If that’s the case, you’ll have to pay flood insurance premiums every year until you pay off your mortgage.

See more: Best Flood Insurance Companies

When Flood Insurance Is Required

There are certain situations where you will be required to buy a flood insurance policy, whether it’s a private flood insurance policy or coverage from the National Flood Insurance Program (often referred to as an NFIP policy ). If you don’t comply with the requirement or simply don’t have enough flood insurance in place, FDIC -supervised institutions or servicers may have to force-placed a flood insurance policy, meaning they will obtain the flood insurance for you and charge you accordingly.

All federally regulated or insured lenders must require flood insurance for buildings located in Special Flood Hazard Areas ( SFHAs ) with federally backed loans. This applies to you if your mortgage is federally insured or is a “conforming loan” secured by Fannie Mae or Freddie Mac, which are government-sponsored enterprises.

The lender will use the Standard Flood Hazard Determination Form from FEMA to determine whether your property is in a Special Flood Hazard Area, if you are required to obtain flood insurance, and whether federal flood insurance is available.

You’re only required to get flood insurance if your mortgage lender requires it and your property is in a high-risk flood zone. You are only required to keep the coverage for the term of the loan. If you own your home and don’t have a mortgage, you don’t have to buy flood insurance, even if you’re in a high-risk area, although it’s still a good idea.

There’s no one required amount, as the amount of flood insurance you need depends on how much it would cost to rebuild your property and the maximum amount of coverage that’s available to you. However, it’s a good idea not to just settle for the minimum amount of coverage. You may want to get more to make sure your home and possessions are fully covered in case of a flood.

Not sure whether flood insurance will be required for you? Property owners can check out their flood risk at floodsmart. gov or on FEMA ’s flood maps. If these websites say your property is in a high-risk area, your lender or loan servicer will probably want you to buy flood insurance. The final decision on flood insurance requirements comes down to flood insurance rate maps and an official flood zone hazard determination.

How to Get Flood Insurance

Flood insurance works just like any other insurance product. You will pay an annual premium based on the flood risk of your property and the deductible you choose. Then, if a flood damages your property, the insurer will pay you cash to repair the damage up to the policy limit.

You have to buy your flood insurance policy before you close on your property, around the time of loan origination, and renew it every year to cover the principal balance on the loan. Usually, your lender or loan servicing company will collect your flood insurance payments at the same time they take your monthly mortgage payment. The funds will be held in your escrow account and paid to the insurance company once a year, just like how property taxes and homeowners insurance are handled. You simply make your monthly mortgage payments and the lender does the rest.

So how do you find a policy? Both private and NFIP policies are issued by private insurance companies. You can find participating insurance companies on the FEMA website. Work with an insurance agent to determine how much flood insurance you need for your mortgage. You can choose from a policy that covers replacement cost value, which would cover the full cost to replace or repair damaged property, or actual cash value, which deducts depreciation for wear and tear based on the item’s condition and age.

The amount of flood insurance you can get and where you’ll get it from are determined by which flood zone your house is in. Private insurers usually don’t write policies for people in high-risk zones, but they will insure you for as much money as your home is worth. The National Flood Insurance Program specializes in insuring high-risk homes, but coverage for single-family homes is capped at $250,000 per claim. If your home is worth more than that but you can’t get covered by a private flood insurer, you’ll have to settle for a policy for less than your home is worth. This may be an issue for your lender, who may require you to pay a higher interest rate to offset the risk.

What Flood Insurance Covers

Private flood insurance typically combines building and contents coverage, while the NFIP requires you to buy the two components separately. These things are usually covered by building or structural coverage, according to FEMA:

• The building itself and the foundation

• Electrical and plumbing systems

• Central air conditioning, furnaces, and water heaters

• Refrigerators, stoves, and built-in appliances (like dishwashers)

• Permanently installed carpet over an unfinished floor

• Permanent paneling, wallboard, bookcases, and cabinets

• Window blinds

• Detached garages (up to 10 percent of building property coverage)

• Debris removal

Contents coverage includes your personal property that isn’t part of the house. This could include things like:

• Clothing

• Furniture

• Electronic equipment

• Curtains

• Portable and window air conditioning

• Portable appliances, like microwaves and portable models of dishwashers

• Carpets installed over finished floors

• Washers and dryers

• Food freezers and the food inside

• Certain valuables, like artwork

Frequently Asked Questions

Find Your Flood Insurance Policy Now

If your lender is telling you that you need to buy a flood insurance policy, don’t wait. Start talking to insurance agents as soon as you can so you can get a policy in place before your lender force-places one for you. There will probably be a waiting period before your coverage kicks in, so act quickly to make sure your policy is in effect before a flood hits.