So you finally did it. You saved up enough money to put a down payment on your first home, and pay closing costs. You spent hours completing paperwork, and gathering documents for your mortgage lender. You received your loan approval, and are so excited about your upcoming closing. Then the phone rings. It is your lender calling back to inform you that the property you have selected is located in a high risk flood zone, and you are required to purchase and maintain flood insurance. Not only are you required to purchase it, but it is required to be paid for one year up front at closing. This is an unexpected expense that, depending on your flood zone rating, can exponentially increase your closing costs. Many homebuyers have never even heard of a flood zone, much less been informed that flood insurance may be a requirement. So why, and when, is it required?
In the 1960’s, the United States suffered many crippling flood disasters and flood insurance was widely unavailable (FYI, it’s still not covered by your homeowner’s insurance). Most homes contain a mortgage, and most mortgages are obtained by a federally regulated bank. Without flood insurance, homes destroyed by floods were becoming a national financial crisis without money to rebuild homes, communities, and lives.
The federal government stepped in and created the National Flood Insurance Program (NFIP) in 1968 which created affordable insurance for flood disasters which wasn’t covered, and still isn’t covered, by homeowner’s insurance. At first, the Department of Housing and Urban Development (HUD) managed the program, but it is now maintained by the Federal Emergency Management Agency (FEMA). To implement the program, FEMA maintains Flood Insurance Rate Maps (FIRM) which show you where the high and low-risk flood areas are by drawing Flood Zones on the map based on engineering and environmental analysis. Mortgage lenders use this map, and the Flood Zone for your house, as the official determination of whether or not you live in a high-risk flood zone. You can obtain a copy of your map on FEMA’s Map Service Center website (msc.fema.gov/portal), or request it by mail or phone. You should also request a copy of the Flood Insurance Study (the engineering data used to create the flood maps) performed for your area. This will categorize your property into one of two areas: low to moderate risk, or high risk.
If your property is mortgaged through a bank, and that bank is insured or regulated by the U.S. government (FDIC, FHA, HUD, etc.), and you live in a high-risk flood area, you are required to carry flood insurance to protect the mortgage's collateral (your home) and it’s not covered by your homeowner’s insurance – it’s a separate insurance policy. A flood insurance policy is offered by FEMA, but today you can also buy a non-federal flood insurance policy as long as your lender accepts the policy as meeting federal requirements. A good real estate agent or lender will advise you of your flood zone far in advance of a closing date. If you are purchasing from an owner, it is your responsibility as the buyer to request this information.
If you purchase or live in a property which does not have a mortgage or loan, you may not be required to maintain flood insurance. However, it is highly advisable by both FEMA and the National Flood Insurance Program to get flood insurance because it is not covered by your homeowner’s insurance and flood is the most costly form of natural disaster in the U.S. You may be thinking that you can get a bail-out if there is a federal flood disaster, but a little known fact is that in many cases, these funds are provided by the U.S. Small Business Administration, and are required to be paid back. In other words, “we will help you get back on your feet, but then we want our money back.” Maintaining a flood insurance policy for any risk area can prevent you from ever having to fall into this category. For low to moderate risk areas, you are not required to have flood insurance, but homes in these areas qualify for a “Preferred Risk Policy” which is significantly less expensive but has the same coverage as if you are in a high-risk flood area.
So let’s recap…. Homeowner’s insurance doesn’t cover flood. There are no FEMA bailouts – insurance is the only way to recover your personal losses from a flood. Low to moderate risk flood area? Coverage optional, but highly advisable, and it’s cheap. High risk flood area? Coverage required. Flood insurance is available as a federal or private policy. And you can find your flood risk area on a Flood Insurance Rate Map from FEMA, or you can ask your lender or seller if they have the information readily available. Either way, awareness of the flood zone a property lies in is an important piece of information for any homeowner or buyer to have.