When shopping for a house, take notice of any streams, rivers, ponds, and other sources of water near the home, because the lender may require flood insurance as a condition for the loan.
The typical homeowner’s insurance policies do not cover flood water damage. It only insures against damage caused by water falling from the sky. After the rainwater touches the ground and enters your home, it’s a flood, and only flood insurance will pay for the damage.
According to the Federal Government, in high-risk regions, there is at least a one-in-four probability of flooding over a 30-year mortgage.
"Flood insurance is required by federal law for any federal or federally linked financial assistance for the acquisition and/or construction of structures in high-risk flood regions." — Fema.gov
The Flood Disaster Protection Act compels lenders to make a flood assessment on your property whenever they create, increase, renew, or extend a loan on it.
The total amount of flood insurance coverage required under the Flood Disaster Protection Act of 1973 and later amendments is the lesser of:
- The structure's insurable worth
- The loan's outstanding principal balance
- The maximum amount of coverage allowed for the specific property type
Flood insurance is not required by federal law in moderate-to-low-risk regions; nevertheless, a lender may demand it.
In reality, regions outside of high-risk flood zones account for more than 20% of all flood insurance claims.
For most first mortgages secured by one-to-four-unit properties, individual PUD units, and certain individual condo units (such as those in detached condos, townhouses, or row houses), the minimum amount of flood insurance coverage is the lesser of:
- The unpaid principal balance of the mortgage
- 100 percent of the replacement cost of the insurable value of the improvements
- The maximum insurance policy amount
Contents coverage (such as a sofa or appliances) must be bought separately.
Flood insurance will not pay out more than the policy maximum, which is typically $100,000.
If you had a $300,000 home that was completely destroyed by a flood, the most amount you may get under the program is $250,000, which just covers the building.
Flood insurance escrow
Subject to certain exclusions, lenders are obliged to escrow all flood insurance premiums and costs beginning January 1, 2016.
Flood insurance premiums in high-risk regions are determined by a number of variables, including elevation and building structure. A typical flood insurance coverage costs about $700 per year.
Before your insurance takes effect, you must wait 30 days from the date of purchase.
FloodSmart.gov can help you assess your flood risk and estimate the cost of flood insurance. You may also locate a flood insurance agent through the FloodSmart.gov website.
Is flood insurance required for FHA loans?
When it is found that any part of the residential improvements is situated within a Special Flood Hazard Area (SFHA), insurance under the National Flood Insurance Program must be acquired.
A property is ineligible for FHA insurance if:
- A residential building and related improvements to the property are located within SFHA Zone A (a Special Flood Zone Area) or Zone V (a Coastal Area), and insurance under the National Flood Insurance Program (NFIP) is not available in the community
- The improvements are or will be situated inside a Coastal Barrier Resource System (CBRS).
The FHA single-family Housing Policy Handbook is the source of this information.
Amount of flood insurance required
For properties located within an SFHA, you'll need flood insurance in an amount at least equal to the lesser of:
- The appraiser's estimated replacement cost, less the appraiser's estimated site value
- The outstanding balance of the mortgage
The maximum amount of NFIP insurance available with respect to the property improvements must be maintained for the life of the mortgage.
FHA flood insurance deductible requirements
The homeowner flood insurance affordability act of 2014 repealed and modified certain sections of the Biggert-Waters Flood Insurance Reform Act of 2012.
Previously, the maximum deductible for a flood insurance policy for an FHA house loan could not exceed $1,000 or 1% of the face value of the policy.
In addition to many other modifications, the new legislation says that for non-condo residential buildings, flood insurance deductibles will be offered in a variety of levels, up to and including $10,000 for FHA loans.
Frequently asked flood insurance questions
Can you get flood insurance in a flood zone?
Does flood insurance cover additional living expenses?
Does flood insurance cover appliances?
Refrigerators, cooking stoves, and built-in appliances (i.e. dishwashers) are covered.
Does renters insurance cover flood?
Probably not. flood coverage is obtained through a separate flood policy.