Why Does Your Mortgage Company Require You to Carry Flood Insurance?

First time home buyers may be surprised to learn that their monthly mortgage payment may be $100 or so more than they expected, thanks to flood insurance coverage required by lenders. In some cases, you may need to put additional funds into escrow on top of taxes and homeowners insurance; these funds are to cover flood insurance premiums. If you are not buying a beachfront home or a home on the banks of a river, it may not be obvious that your home has been determined to be at a high-risk of flooding. To be sure, before you sign any sales contract, ask your real estate agent and your lender if you are in a Special Flood Hazard Area (SFHA). If you are, it is almost certain that one of the conditions for obtaining a loan to purchase your home is that you buy and maintain flood insurance throughout the life of your mortgage.

Here are a couple reasons why your lender might require you to get flood insurance.

Reason 1: Federal Law Mandates Flood Insurance

Almost all companies that offer mortgages are federally regulated or insured. Whether you get an FHA loan or you get a conventional mortgage, the federal government almost always has ties to the lender. Both large and small banks rely on the Federal Reserve banks in the course of their operations. Individual bank accounts are insured by the FDIC. Congress passed laws that dictate that any federally regulated or insured lender require borrowers to have flood insurance on property in a designated high-risk flood zone. To comply with federal law, banks must insist that borrowers who have property within a Special Flood Hazard Area buy a flood insurance policy.

Reason 2: Lenders Need Protection Against Default

In the event of major damage or destruction from a flood, homeowners that put little down and have little equity in their home present a greater default risk to the lender. Just as homeowners insurance is required to protect against certain perils, flood insurance protects the lender’s financial interest in the property. In Hurricane Katrina and Superstorm Sandy, many homeowners who were facing devastating and uninsured losses simply walked away and stopped paying their mortgages. Banks and other lenders eventually foreclosed on those homes, but they also bore the brunt of losses based on the diminished value of the homes.

With all this in mind, how much flood insurance should you purchase? Consider the following:

Flood Insurance Amounts

The maximum amount of flood insurance you can buy on a house is $250,000. The maximum amount of flood insurance you can buy for your possessions is $100,000. Your mortgage company can only require you to carry the lesser of:

• The maximum ($250,000) available through the National Flood Insurance Program (NFIP)
• The amount you still owe on your mortgage
• The insurable value of the structure (land does not need to be insured)

Points To Ponder

• Make sure you are only paying for the amount of coverage you need.
• You can lower the cost of flood insurance premiums by choosing a higher deductible.
• On very expensive homes, the maximum flood insurance you can buy may not cover your total loss.
• FEMA may help one time with low-interest loans if you suffer an uninsured loss due to a major flood. However, you will not be eligible for any help unless you buy flood insurance on the property that suffered the loss.

While some homes in high-risk flood zones may require flood insurance, it’s prudent to consider this coverage wherever you live. Floods can happen anywhere and at any time. Talk to your independent insurance agent today to learn about your options.

Get a free quote today. Call Guardian Insurance at (855) 464-8273 for a Georgia flood insurance quote.