Flood Insurance Requirements for Lenders
Flood insurance is a special insurance coverage for residential and commercial properties that are located in coastal areas where storms and hurricanes commonly hit. These storms cause a rapid rise in waters that can cause major disaster to these properties. When a lender is making a loan against a coastal property that is located in designated high-risk areas, they will require a borrower to purchase flood insurance to cover their risks.
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Flood Insurance
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Flood insurance is not a part of the borrower's homeowner's hazard insurance policy, but a separate policy on its own. The lender makes the final decision as to whether the property location is actually in a special flood hazard area (SFHA), and will require flood insurance be purchased. This SFHA is determined by pinpointing the property on special flood maps that are created and governed by FEMA (Federal Emergency Management Agency).
What Is Needed to Determine if Flood Insurance Is Needed?
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The lender will place a lot of weight on an appraiser's comments regarding the location of the property and its proximity to flood areas. If it appears that the property is located in or close to a SFHA, they can request a "flood elevation certificate," which will detail if the property is located near the line that demarks the 100-year flood elevation. If it is under the mark, the property (and any attachments) definitely will require the special insurance. If it is above the flood plane line, the lender can still make the determination that the property is still in danger of being flooded, and still require that flood insurance be purchased.
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It Isn't Just the Lenders, It's the Law
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Due to the National Flood Insurance Act of 1968, and the National Disaster Protection Act of 1973, and all of these acts amendments, if a homeowner (with property that is located in a community that is located in a flood hazard area) is being assisted by loans, grants or other federal monies, then the homeowner must obtain flood insurance. Federal programs with this requirement include the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC---aka Fannie Mae and Freddie Mac), FHA and VA. This also includes state and federally chartered banks, savings-and-loan associations and credit unions.
How Is Flood Insurance Coverage Determined?
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Federal regulation requires that the amount of flood insurance coverage that the lender must require the borrower to obtain will be the amount of the balance of the loan, or the total value of the property minus the value of the land, whichever of these is the smaller amount. The lender is also required to be certain that flood insurance is maintained throughout the life of the loan. The lender is required to notify the property owner/purchaser in writing within a reasonable amount of time (10 days) before the closing of a new loan regarding the flood insurance requirement. In the event the borrower does not comply, and closes the loan, the lender can place "forced insurance" on the property, and bill the borrower for it.
Waiving the Requirement for Flood Insurance
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FEMA maintains maps that designate flood lines. These maps can change over time, and the lines that designate flood areas can change. In the event that a change is made, properties that have previously been determined as inside a SFHA but now are outside the flood line can be moved outside (on the map) to a nonthreatened status. A final letter of map ammendment (LOMA) or final letter of map revision (LOMR) is needed from FEMA before a lender can waive the requirement of flood insurance. If it is not clear to the lender whether the property is, in fact, in a flood hazard area, they can request a flood elevation certificate to determine the actual location of the structure as compared to the 100-year flood elevation line, then make their own determination. Some areas that are outside the threatened status (but are still likely to incur damage from flooding in a storm) will still require flood insurance. The lender must make this determination.
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