My Lender Says I Need Flood Insurance. What Now?

Part of every mortgage approval is a flood zone check.

The lender pulls a flood certification. This shows whether the property you are buying or refinancing is in a flood zone.

If it is, you need flood insurance. What to do next.

How To Avoid Homes in Flood Zones

If you’re considering a house, check FEMA’s flood maps. Enter an address to know the risk before making an offer.

Look for zones starting with A or V. If the home is within one of these areas, it’s within a designated Special Flood Hazard Area, or SFHA. The home will require flood insurance.

What’s more is that, if you own the home for 10 years, you have a 10% or greater chance of experiencing flood damage. SFHAs have a 1% or more chance per year of experiencing a flooding event.

Can I Opt Out of Flood Insurance?

If you are getting a mortgage, you can’t opt out of flood insurance for properties within a flood zone.

Just like standard homeowner’s insurance, the lender requires coverage to protect the collateral: the home.

However, there is a slight chance you don’t need it, for the following cases:

1. Your lender receives a letter from the Federal Emergency Management Agency (FEMA) saying maps have been amended and the structure is no longer in an SFHA.

2. The main structure itself is not in a flood zone, only part of the property

3. Only outbuildings or other structures on the property are located in a flood zone

Most of the time, however, a home needs flood insurance if the flood certification indicates it’s in an SFHA.

Where To Find Flood Insurance

In most cases, there’s no avoiding flood insurance if the property is in a flood zone.

Luckily, it’s about as easy to find as regular homeowner’s insurance.

The National Flood Insurance Program (NFIP) is the government organization that administers the program. It works with about 50 private insurance companies.

NFIP suggests starting with your homeowner’s insurance agent or company. If it does not offer flood insurance, peruse NFIP’s company list. No matter which company you choose, you’ll receive similar costs.

Private Flood Insurance

You also have the option of getting private flood insurance, that is, insurance that is not under the NFIP program.

Someone might do this because they can get better coverage than the national program provides. For instance, if you want more than $250,000 in structure coverage, NFIP's maximum.

However, the lender must verify that it meets or exceeds coverage and terms provided by an NFIP policy. The insurer must also be reputable, as defined by meeting one of the rating standards below.

Clear your private flood insurer and policy with your lender prior to paying any premiums.

Does My Standard Homeowner’s Insurance Policy Cover Flood Damage?

Unfortunately, your standard homeowner’s insurance policy does not cover flood damage.

While your policy may cover flooding from a broken pipe or sewer backup, it does not cover flooding from a natural disaster.

How Much Flood Insurance Do I Need?

Ideally, your flood insurance covers the full replacement cost of the home. However, NFIP plans cover a maximum of only $250,000, not enough to build a new home in many areas of the country.

This is why Fannie Mae does not require full replacement cost if NFIP does not offer it. Your insurance coverage must cover the lesser of:

• 100% replacement cost of property improvements

• The maximum coverage available from NFIP

• The loan amount

So if the property would cost $400,000 to rebuild, but the maximum coverage available is $250,000, required coverage is $250,000. If the loan is only $150,000, the minimum coverage required is $150,000.

Flood Insurance Cost

As you can imagine, the cost of flood insurance varies widely based on the home and location.

For a ballpark cost, look at FEMA's average flood insurance for certain single-family homes as of September 2022, the most recent data available. Keep in mind that these are just averages of a subset of homes covered. Your cost will be different.

Also know that current costs are heavily subsidized by FEMA. The agency is gradually raising rates to cover the actual risk associated with the policy. For example, homeowners in Texas currently pay an average of $776 per year but the premiums will rise to $1,405 over time. If you get flood insurance today, expect it to rise in coming years.

What is an NFIP-Participating Community?

If the property is in a community (town, city, county, or other municipality) that doesn’t participate in NFIP, the loan is not eligible for a conventional loan backed by Fannie Mae or Freddie Mac, or a government loan such as FHA, VA or USDA.

It’s best to make sure the locale in which you’re home shopping participates in NFIP. You can look up covered communities by state on FEMA's Community Status Book.

As an example, Alabama has 61 communities not participating in NFIP.

Flood Insurance and Debt-To-Income Ratios

Flood insurance can affect your mortgage approval. The cost will be added to your debt-to-income ratio (DTI) like property taxes, homeowner’s insurance, and HOA dues.

For example, you have a 45% DTI, the conventional loan maximum. You then find out you need flood insurance. The loan may be denied. You would have to find a similarly priced home outside a flood-risk area.

Should You Buy A Home In a Flood Zone

There's no single right answer when deciding for or against a home in a flood zone. In some areas, your options are too limited to avoid these areas.

Weigh your options and cost. Speak to your real estate agent, lender, and insurance agent to make the best choice.