Flood insurance, just like standard home insurance policies, is not normally required by law. Many mortgage lenders do require a homeowner to have a home insurance policy in place in order to receive a mortgage loan. Some lenders may require the homeowner to have flood insurance as well. Flood insurance is never covered under a standard home insurance policy and must be purchased separately or in some cases is able to be added on as an endorsement or rider to a policy.
- While not required by law, some mortgage lenders require homeowners to obtain and maintain flood insurance, especially in high-risk areas.
- Private insurers usually don’t offer flood insurance coverage in high-risk areas. The homeowner typically has to turn to the National Flood Insurance Program in this case.
- Mortgage lenders require flood insurance to protect their investments. Even a small amount of flooding can be devastating to them in recouping the money they have lent out.
When do lenders typically require flood insurance?
Most commonly, mortgage lenders require a homeowner to obtain and maintain a flood insurance policy over the life of the mortgage loan when the home being purchased is in a moderate to high-risk flood zone as determined by the Federal Emergency Management Agency (FEMA). It is less common, but still possible for a mortgage lender to require a homeowner to obtain and maintain a flood insurance policy when living in a low-risk flood zone.
Even if flood insurance is not required by the lender, it still could be prudent and worthwhile for the homeowner to look into a flood insurance policy. Even small amounts of flooding can cause extensive and expensive damage.
How much flood insurance do lenders require?
The amount of flood insurance a mortgage lender may require a homeowner to have differs in each individual circumstance. Some lenders will require the homeowner to have enough flood insurance to cover the full value of the home while some will only require the homeowner to have enough coverage to cover the value of the loan.
Let’s say you purchase a home worth $300,000 and put $50,000 down. If the lender requires flood insurance to cover the whole value of the home, you would need $300,000 of flood insurance coverage. This contrasts with a lender who is only requiring the homeowner to maintain enough coverage to cover the mortgage loan. In this case, the homeowner would only need $250,000 of flood insurance. Over time, as the amount of the loan is paid down, the homeowner could theoretically reduce their flood insurance coverage. Let’s say that 10 years later the outstanding mortgage loan balance is down to $150,000. The homeowner could talk with their insurance agent about reducing the original $250,000 of coverage down to $150,000 to still be in compliance with what the mortgage lender requires, but lowering the policy premium and coverage if they choose to.
Even if the lender only requires the homeowner to have a small amount of flood insurance, it still is usually best practice for the homeowner to obtain enough flood insurance to cover the total value of the home, especially if the home is in a high-risk flood area. Floods can be unexpected and cause incredibly expensive damage to a home in a short amount of time. The mortgage lender may mostly be simply trying to protect themselves; they are also helping to protect the homeowner as well.
Mortgage lenders typically don’t require any amount of flood insurance for a homeowner’s personal property as the lender is not on the hook for damage that occurs to a homeowner’s personal belongings. While this is the case, homeowner may want to ensure that their flood insurance policy contains adequate personal property coverage to fully protect their personal belongings in the event of a flood.
Frequently asked questions
Where to purchase a flood insurance policy?
Flood insurance is not included in a standard home insurance policy and must be purchased separately. There are some private insurers who will over flood insurance coverage, but most private insurers don’t offer flood coverage in high-risk flood areas. If this is the case in your situation, the other option is to turn to the National Flood Insurance Program (NFIP) whose main purpose is to insure homes in high-risk flood areas. One thing to note is that the NFIP typically caps coverage at $250,000 per home. This can leave the homeowner with a portion of the home value that is not covered for flood damage. This would be the case in the example used above. If the insured bought the policy through the NFIP, their $300,000 home would only be covered for $250,000 of flood damage and the other $50,000 would be left to the homeowner to pay.
What is the cost of flood insurance?
In the highest-risk areas of the country, flood insurance policies can cost somewhere in the $750 per year range which is one of the more expensive coverages, but even just a small amount of flooding can cause upwards of $25,000 worth of damage. Flooding is one of the most common perils faced, not just in the US., but all over the world, and is one of the most expensive damages. In the grand scheme of things, flood insurance is inexpensive comparatively speaking.
Does flood insurance come with mortgage insurance?
While flood and mortgage insurance sometimes get wrapped up together in terms of being paid through an escrow account, they are still separate policies. Flood insurance is its own thing, but can be paid through an escrow account with the rest of the insurance policies protecting the home. This can sometimes be nice as it simplifies the payments and can spread them out into monthly payments versus every six months or year.
Summary
Flood insurance is not a government-required insurance protection to have, but is required by many mortgage lenders, especially in higher-risk areas. Mortgage lenders want to protect their investment from this common and costly peril. Flood insurance is not included in a standard home insurance policy and must be purchased separately through a private insurer or through the National Flood Insurance Program.
