Flood Insurance: Can Mortgage Lender Require It?

Homeowners insurance is mandatory when you have a mortgage on a home by the mortgage lender.  Once the house if paid off and free and clear, it is up to you whether you want to maintain homeowners insurance, also known as hazard insurance.  You are quoted an annual homeowners insurance premium and the mortgage lender will escrow that amount every month and it will be part of your monthly mortgage payment.  Your monthly homeowners insurance ( annual homeowners insurance divided by 12 months. ) is part of your housing expenses and is used to calculate your debt to income ratios.  However, some homes that are in a flood zone will be required, by the mortgage lender, to have flood insurance which is an add on to the regular hazards homeowners insurance and sometimes can be quite costly.  If the home that you are purchasing is in a flood zone, flood insurance will be mandatory in order for you to close on your home.  There are no exceptions.  If you are out shopping for a home and you have a home that you are about to put an offer in, make sure if the home is in a flood zone and if it is, ask them what the sellers are paying for flood insurance.  Most flood insurance costs anywhere from $500.00 and up on top of the homeowners insurance.  Flood insurance premium can go over $1,000 a year depending on the area the home is located in.

Flood Insurance: Why Is It Necessary?

As mentioned earlier, mortgage lenders will make mortgage loan borrowers to have flood insurance on flood zone areas.  Flood zone areas are areas where the federal government deem it as a high risk flood area which has been determined through studies, analysis and statistics by the federal government and resulted that the flood zone areas have far greater risks of flooding than most geographical areas that do not require flood insurance.

National Flood Insurance Program: Federal Program For Flood Insurance

The federal National Flood Insurance program has been created in 1968 and has been offering flood insurance to flood zone area homeowners.  Majority of private insurance carriers do not offer flood insurance.  About a quarter of the homes in the United States are located in flood zones.  Since only the homeowners in flood zones purchased flood insurance coverage, there was not enough homeowners to pay for flood insurance and therefore the pool of insurance funds was just limited those in flood zone areas.  Private insurance companies stopped writing flood insurance policy because of the limited amount of homeowners that they could collect premiums and there were not enough of insurers to spread the insurance pool for them to be profitable.  This is the reason the federal National Flood Insurance Program was created.

Flood Zone: High Risk Areas Prone To Flooding

The National Flood Insurance Program determines a high risk flood zone area where through their use of topographical surverys where they can scientifically determine low lands prone to flooding, is a geographical area that has at least a 1.0% or higher chance of flooding in any year.  So, if the land where your home is built on has a 1.0% or greater chance of flooding in any given year, your property is considered to be located in a flood zone and has a high risk probablility of flooding.

Can Mortgage Lender Require To Buy Flood Insurance If It Is Not On Flood Zone?

Federal mortgage lending guidelines require that mortgage lenders make their borrowers have flood insurance on federally named high risk flood zones.  However, there are low risk flood zones where the federal government does not require homeowners to carry flood insurance.  However, a mortgage lender can require a homeowner to carry flood insurance in a non federally named flood zone area.  It is a mortgage lender’s overlay and mortgage lenders can implement any overlays they want.  If you are not happy with a mortgage lender’s overlay, you can choose a different mortgage lender that does not have mortgage lender overlays or very limited mortgage lender overlays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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