How Does a Mortgage Lender Determine If a Home Requires Flood Insurance?

Federal Law

The federal government has made flood insurance a requirement for certain properties since the 1970s. In fact, the 1973 Flood Disaster Protection Act and the 1994 National Flood Insurance Reform Act created the parameters by which flood insurance may be deemed mandatory for a property. Specifically, any property located within a Special Flood Hazard Area as established by the Federal Emergency Management Agency (FEMA) can be required to hold flood insurance.

The mantra of location, location, location is not limited to property values within real estate. Not surprisingly, location also plays an essential role in determining whether a property requires flood insurance. During the home appraisal, the appraiser will make notes regarding the location and, particularly, the setting of the property on that location. The lender will then consider these notes and compare them to the maps provided by FEMA. If the property appears to be in or very close to a Special Flood Hazard Area, the lender will require that the property be covered by flood insurance. In some cases, lenders will require the flood insurance even if the property is not clearly in the flood zone, just to be on the safe side.

Flood insurance coverage is determined largely by the cost of the loan. In other words, the homeowner is required to have the amount of flood insurance that reflects the value of the loan (or the value of the property, as determined by the appraiser), excluding any land that the property contains. This means that a $150,000 home on 10 acres, with the acreage worth another $100,000, only has to have coverage for the $150,000 home.

The burden of notification is placed on the lender for letting the homeowner know that flood insurance is required. Federal law requires that the lender let the homeowner know about the need for flood insurance at least 10 days before the scheduled closing of the property. If the homeowner fails to secure a flood insurance policy, the lender may select one for the homeowner and affix the policy fee to the loan price. If the homeowner acquires a policy but fails to make the payments on it, the obligation once more falls on the lender to secure a policy (and then bill it to the homeowner).

FEMA is constantly reviewing and revising the maps to determine the Special Hazard Flood Areas. As a result, the maps may change, and a homeowner may be told that he needs flood insurance after the map has already been adjusted and the property no longer falls within the hazard area. If this occurs, the homeowner must contact FEMA and request that the agency send the lender a Letter of Map Amendment so that the lender has legal reason to waive the requirement for flood insurance.