The U.S. Department of Housing and Urban Development (HUD) recently made available $179 million in additional funding to help states recover from severe flooding that occurred in 2015 and 2016. This opens the topic of flood insurance among residential homebuyers. If you were to buy a home, is it required to get one prior to closing the mortgage?
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Flood Insurance: An Option or a Requirement
When is the purchase of a flood insurance mandatory or optional? Before anything else, let’s understand what this type of insurance does first.
A flood insurance covers losses arising from the damage to property caused by flooding. This insurance covers structural damage to the home and its foundation, electrical, plumbing, furnace, heating, and air conditioning systems.
This coverage also includes the contents of the home such as built-in appliances, refrigerators and carpeting even. Valuables such as jewelry and fur are often subject to an additional policy.
The costs of getting or maintaining a flood insurance on your home depend on a number of factors such as the structure of the property, its age and its risk of being flooded. As noted below, federal laws can dictate the amount of relevant coverage you need to purchase.
Indeed, the flood insurance is separate from the standard homeowners insurance; the requirement of another policy concerning the home per se is a sticky point for homeowners concerned with additional expense.
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To answer the burning question, you are required to obtain a flood insurance if your property is located in an area designated as a Special Flood Hazard Area (SFHA) where such policy is available under the Flood Disaster Protection Act (FDPA or Act).
More importantly, a federally regulated or insured lender like an FHA, VA or USDA-approved lender will not make a mortgage unless a flood insurance is obtained on the said property pursuant to the Act.
You can purchase a flood insurance from a network of insurance carriers. The insurance policy per se is available through the Federal Emergency Management Agency (FEMA) and its National Flood Insurance Program (NFIP) to which your community must be a participant of.
The Act requires the mandatory amount of insurance to be purchased to be the lesser of: (a) the mortgage’s outstanding principal balance or (b) the maximum insurance amount available under the NFIP, whichever is lower of the maximum insurance limit applicable to the structure or its insurable value.
When It Is An Option
If your property is not covered by the Act, it’s up to you and the lender to stipulate whether you’ll need to take out a flood insurance on the home to be purchased.
In situations when the property is located in a community that does not participate in the NFIP, the lender may not require a flood insurance. The lender can opt to make a conventional financing without flood insurance, even when the property is located in an SFHA.
However, the lender can’t make a government-insured mortgage securing a home in an SFHA-designated area located in a community that does not participate in the NFIP.
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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.