Can a Mortgage Company Add on Flood Insurance?
Homeowners with federally insured mortgages are required to buy flood insurance if their home is in a high-risk area. If the homeowner fails to do so, the bank is required by the federal government to force-place flood insurance. When a bank does this, the policy can often be more expensive than what the homeowner would buy on his own. Standard homeowners insurance policies usually do not cover flood damage.
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Disclosure
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The Federal Emergency Management Agency compiles maps of areas that are at high risk of flooding. Banks are required to check these maps and notify homeowners of the need for flood insurance at least 10 days before closing on a mortgage. Most people buy insurance through the National Flood Insurance Program, a federally subsidized insurance plan. Private insurance that is not backed by the government is available, but is usually more expensive.
Escrow
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If a bank keeps funds in a special account to pay for property taxes and other forms of homeowners insurance, it is also required to escrow. According to floodsmart.gov, the average policy costs about $570 per year. But policies can be much more expensive. An NFIP policy in a high-risk area offering coverage for $250,000 for a building, and $100,000 for its contents costs approximately $2,700. In a coastal area, the cost can more than double for the $250,000 policy.
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Non-High Risk Area
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Banks are also permitted to require flood insurance, even if the home is not in a high-risk flood zone. NFIP insurance is available for areas that are not deemed to be high risk. Floodsmart.gov says that about 25 percent of flood claims come from areas that are at low or moderate risk of flooding.
Congressional Fights
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Because the NFIP is a federal program, it must occasionally be reauthorized by the U.S. Congress. Congress however, has often been slow to enact budgets, and FEMA's authority to administer NFIP and offer new flood insurance policies lapses. This last happened in April 2010, but the program was reauthorized in September of that year. When this happens, banks are required to notify buyers that they are in a flood hazard zone, but they are not required to mandate flood insurance. They are permitted to do so.
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