Your dream waterfront vacation house carries extra responsibilities, especially when it comes to the mortgage. If you have a mortgage on a property in a flood hazard zone, you must maintain flood insurance in an amount acceptable to the lender. While a certain level of coverage is available from the federal government, the amount is limited. If the amount available under the government’s program is not enough to cover the amount of the loan, the bank can require you to obtain excess flood insurance.
Flood Insurance Requirements
When you apply for a mortgage, the lender runs a flood determination. This lets it know if your home presents a risk of flood damage. If your home is in a Special Flood Hazard Area (SFHA) it can be a real pain in the neck, since traditional homeowners insurance doesn’t cover flood damage. The bank won’t make the loan without coverage, so you need to obtain separate flood coverage at an additional premium. You also have to name the lender as mortgagee so the insurance company knows it gets paid first in the event of damage.
In 1968, Congress created the National Flood Insurance Program. The program allows you to purchase insurance from the government if you live in a participating community. When the lender runs its search and determines you are in a flood hazard area, it is required by law to forward you a notice saying exactly that. This notice will also let you know if your community participates in the NFIP. If it doesn’t, you will unfortunately have to pound the pavement and find an insurance company that covers flood damage.
The NFIP is, unfortunately, not without its limitations. It only offers coverage up to a certain amount, depending on the type of property you’re using as collateral. The maximum coverage available for a residential property is $250,000. This isn’t a problem if your loan is less than that amount. If you have a $350,000 mortgage, the bank is not covered for the full amount of the loan. This isn’t going to fly with your lender, so it will require you to get excess flood coverage. It will be your responsibility to find an insurer that offers flood coverage, name the lender as loss payee and forward the policy to the lender prior to closing.
Don’t think that once you close on your loan, you can let your excess flood coverage lapse because the money is out the door. You must provide your lender with proof of renewal each year. Many lenders will even escrow for the payments to ensure they’re being made. If your coverage expires, the lender will give you a time-frame, usually 30 to 45 days, to provide proof of renewal. If you don’t, it will “force place” the insurance. This means it will purchase a policy and pass the charges along to you. It will do so through the government’s Mortgage Portfolio Protection Program. If you think this isn’t a big deal because the lender will get the coverage it needs, think again. The rates through this program are significantly higher than the insurance you would have been able to obtain on your own. The moral of the story is to make sure you maintain your excess coverage.