- When Is Flood Insurance Required by Mortgage Lenders?
When Is Flood Insurance Required by Mortgage Lenders?
It may be common knowledge among homeowners that flood insurance isn’t required by law. But, even though laws may not require you to purchase flood insurance, your mortgage lender can put stipulations in your contract agreement that you must maintain adequate flood insurance on your home during the entirety of your loan.
That’s because your lender still has a stake in your investment while you’re still paying for your loan. Once your loan has been paid in full, you aren’t under any contractual obligation to keep your flood insurance policy — but we always recommend having flood insurance to keep your investment afloat.
Let’s dive into everything you need to know about mortgage lenders’ flood insurance requirements, including how much you must have and how to get it.
When Is Flood Insurance Required by Mortgage Lenders?
Mortgage lenders typically require borrowers to have flood insurance if they live in a moderate- to high-risk flood zone, as designated by the Federal Emergency Management Agency (FEMA) and while they still carry a balance on their loan. However, mortgage lenders can obligate any homeowner to purchase flood insurance at any time — no matter which flood zone they live in.
Whether flood insurance is required by your lender or not, it’s always a good idea to maintain adequate flood insurance at all times.
Why Is Flood Insurance Required by Lenders?
If a home is damaged by flooding and the homeowner doesn’t have flood insurance to pay for the repairs, they’ll be stuck paying out of pocket for all the repairs needed. And floods can be expensive. In fact, just 1 inch of floodwaters inside a home can cause up to $25,000 worth of damage.
But what happens if the homeowner doesn’t have enough money to pay for the repairs? Then the homeowner can’t make the necessary repairs to fix the home, potentially causing it to go into foreclosure and get repossessed by the very lenders the money was borrowed from.
The major issue with that, besides that homeowners may have no choice but to file bankruptcy to get out of the loan, is that the lenders are now stuck with a home in disrepair. They’d then have to sell the house as-is to a short seller or at an auction, or they can invest the money themselves to repair the home.
When you take into account that the average cost of flood insurance is about $600 per year in the most expensive areas, that investment seems mighty worthwhile in comparison to fixing $25,000 or more worth of flood damage.
How Much Flood Insurance Is Required?
Flood insurance requirements differ on a case-by-case basis, but the major factors for determining how much flood insurance is required are the value of the home and the amount left on the loan.
Some lenders may only make you insure your home for the opposite equity amount you have invested in the property, while others will make you maintain the exact amount of coverage as the home’s value.
In the first scenario, let’s say you’re a homeowner with a $200,000 home. If you have $100,000 equity in your home and still owe $100,000 on the mortgage, your lender may only require you to purchase $100,000 worth of flood insurance to protect the dwelling.
In the second scenario, the lender knows how risky floods can be — and they can strike at any time without warning — so they’ll require you to maintain $200,000 worth of flood coverage at all times, even if you only owe $20,000 on the home.
Whichever requirement your lender may have, it’s always smarter to opt for the same amount of flood coverage as your home is worth. Insuring your home to its full value ensures there’s absolutely no margin for error, which is especially crucial when you factor in the minimal cost of flood insurance and the maximum cost of repairs if your home is damaged by a flood.
Do You Get Flood Insurance With Mortgage Insurance?
Mortgage insurance and flood insurance are two separate policies, just like homeowners insurance and flood insurance are two separate policies. But similar to homeowners insurance being paid through an escrow account held by your lender, flood insurance can also be paid through an escrow account.
The escrow account can actually pay for flood, homeowners and mortgage insurance, but you’ll still have separate policies for each. You’ll also still have to pay into your escrow account on a monthly basis, but doing so means you can pay monthly for a policy that may be due every six months or so.
Paying for flood insurance through an escrow account simply divides the payments into smaller portions. It doesn’t, however, give you the ability to combine policies or get a discount on your premiums.
Getting Flood Insurance for Mortgage Satisfactions
Whether you’re getting flood insurance to satisfy your mortgage lender’s requirements or you’re getting it to satisfy your own sense of safety, you should buy flood insurance immediately and keep it effective all year long — not just during flood season.
With Clovered, all you need to do is fill out our online flood insurance quote form, which takes just a minute or two, and one of our many licensed agents will provide you with a quote that meets your needs and your budget.
The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.