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If you’re approved for a mortgage for a home in a flood zone, your lender will likely require you to purchase flood insurance. You might have wondered, then, “How much flood insurance do I need?” But don’t stop there. As the borrower, it’s important to know why your lender is requiring you to have a flood insurance policy, how much it will cost and what it will cover.
How much flood insurance do you need for a mortgage?
To find out how much coverage you need, start by figuring out how much flood insurance is required by your lender. In a lot of cases, that depends on who’s backing your loan.
Madelyn Rodriguez, a partner at Clausen Choquette, PLLC, in Boca Raton, Florida, says that any government-insured mortgage — including an FHA, USDA or VA loan — sets a minimum flood insurance coverage requirement if the property is in a high-risk flood zone. FHA flood insurance requirements, for example, state that you’ll need to cover the full replacement cost of your home.
“A private lender who is not subject to the rules for federally-backed loans may also require you to have flood insurance, although there is no legal obligation for them to do so,” says Rodriguez.
Most flood insurance coverage is provided via the National Flood Insurance Program (NFIP), which is available in many communities throughout the country. Coverage limits can vary, but the maximum amount is $250,000 on a residential property and $100,000 for its contents and personal property, according to Kyle Herring, vice president at All American Public Adjusters in Austin, Texas.
Note that if your home is higher in value, the $250,000 ceiling may not be enough. To cover that gap, Rodriguez says you can get a supplemental flood insurance policy from a private company. These insurers aren’t as readily available like NFIP coverage is, however, and they may have much higher premiums and deductibles.
Why do mortgage lenders require flood insurance?
Lenders require flood insurance if a property you want to buy or refinance is located within a flood zone designated by the Federal Emergency Management Agency (FEMA).
“A mortgage lender has a financial interest to protect the property’s value in the event of a catastrophic flood loss, especially if that home is located in an area at higher risk for flooding,” says Herring. “If flood damage is suffered and funding is not available to repair, the home’s value diminishes significantly, which negatively impacts the lender and the homeowner.”
To learn if your desired property is within a flood zone and may require flood insurance, you can visit FEMA’s Flood Map Service Center and search using the property’s address. You can also request this information from your real estate agent.
FEMA’s designated flood zones fall into two categories:
- Special Flood Hazard Areas (SFHAs), which include zones beginning with the letters A or V. These are higher-risk areas where you’ll probably be required to purchase flood insurance.
- Non-SFHAs, which are moderate- to low-risk zones with the letters B, C or X. Generally, you’re not required to obtain flood insurance if the home is in one of these zones.
What is the cost of a flood insurance policy?
If you’re not located in a high-risk flood zone, the cost of flood insurance may be $400 or less annually, according to Brian Bradley, personal insurance advisor for CBIZ, Inc., an insurance provider, in Cumberland, Maryland.
If you’re in a high-risk zone, however, “the policy will be much more expensive — but it can be reduced if your home is positively elevated above the floodplain by obtaining an elevation certificate completed by a licensed surveyor.”
If NFIP coverage is available in your area, it’ll likely be the most affordable option. The average cost of NFIP insurance yearly is approximately $700, Rodriguez says, “but this amount varies greatly by the location of the property, amount of coverage needed and proximity to bodies of water.”
Flood insurance premiums can also increase from year to year, especially for private insurance policies.
“Most see increases ranging from 6 to 12 percent annually,” says Carolyn Rummel, president of Florida Operations at Meadowbrook Insurance Agency, based in Sarasota, Florida.
Additionally, flood zones and classifications can change. Your low-risk zone may be designated a high-risk zone later on, which means you may be required to get flood insurance or pay more for it.
“If you have lower policy limits, you may also want to increase your flood policy coverage limits in the future as the cost of construction increases,” says Rodriguez.
Keep in mind that if you opt to refinance down the road with a different lender, the new lender may be more or less stringent regarding minimum flood insurance coverage requirements, as well.
How to avoid the flood insurance requirement
To a large extent, the coverage you need hinges on how much flood insurance is required by a lender and if your property is located in a high-risk zone. If you own your home outright with no mortgage attached, you don’t have to purchase flood insurance — although it’s still strongly recommended.
“If you select a lender or mortgage product that isn’t federally backed, you likely won’t be forced to comply with flood policy requirements,” says Rodriguez. “If the home you desire is in a high-risk area, you’ll probably have a difficult time locating any such lender.”