Can a Lender Force You to Carry Flood Insurance?
Lenders must require you to buy flood insurance if your property is in a high risk flood plain if they want to sell your mortgage to federal underwriters. They can require you to buy flood insurance, regardless of whether your property faces high risk of flooding, as a condition of making a loan. Standard homeowners insurance rarely covers floods.
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The Basics
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Most flood insurance in the United States is offered through the National Flood Insurance Program. Policies in the NFIP are subsidized through the federal government, which buys most mortgages from private banks after they are made. Imagine a flood hits a property with a federally-backed mortgage and the home is destroyed. Without flood insurance, the homeowner has little incentive to continue paying the mortgage, because they are paying a mortgage for a house that doesn't exist. In these situations, its is federally-backed agencies, such as Fannie Mae, that are left holding the bag.
Costs
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The average flood insurance policy costs about $570 per year in 2010. Rates however, can vary widely, depending on the value of the building, whether its contents are also insured, and whether the local government has taken steps to mitigate the risk of floods. Some buildings built in flood plains, and before NFIP coverage was available, are able to secure rates that do not cover the risk they face.
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Audits
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Federal law doesn't place the burden of making sure a home has flood insurance on homeowners. It places this burden on federally-regulated lenders and those that want to sell mortgages to government sponsored entities. These banks and underwriters face audits to determine compliance with federal law. Banks are also empowered to buy insurance on behalf of their customers and bill them if they fail to buy their own coverage.
Risks
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High risk areas are those that have a 1 percent chance of flooding annually. This might not sound like a lot, but properties in this category face a 26 percent chance of flooding throughout the life of a 30-year mortgage. According to Floodsmart.gov, 25 percent of flood claims are made in low and moderate risk areas. Banks rely on maps developed by FEMA to determine an area's risk of flood.
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References
- Photo Credit flood sign image by Andrew Breeden from Fotolia.com
