Up until this point, everything was going great. You loved the house, it fit your budget and, by the grace of God, your offer got accepted.
But then it was your mortgage lender, Dasher of Dreams, who let you know that the property sits in a special flood hazard area, and that it will require flood insurance. I know — this is something that should have been revealed earlier in the process, and most often it is, but this time around, the fact that the property may be susceptible to flooding risk came up late and was discovered when your mortgage originator pulled a “flood cert.” So what is flood insurance, what are the requirements? Is it going to be expensive?
[Too lazy to read the rest? Watch the short video below instead!]
Coastal areas, rivers and streams and sometimes even the unlikeliest of areas might be subject to a flood hazard. Lenders assess this risk by accessing FEMA’s flood maps as part of the loan process. “Pulling a flood cert” will reveal if the property is an area of hazard and if it is, it could require flood insurance. Flood insurance itself is most often provided by the National Flood Insurance Program (NFIP) and the insurance agent of your choice can help you purchase the policy. The standard NFIP policy will insure the homeowner’s property for up to $250,000, though contents coverage is separate and available for up to $100,000 in coverage. Lenders will require the property coverage in cases where the property is in a flood zone. Of late, we are seeing more homebuyers purchase “private” flood insurance policies through carriers such as Lloyd’s of London, and we also see some buyers obtain “supplemental” coverage. With high-value, coastal properties, one can easily see that $250K of coverage would be woefully inadequate in the case of a serious flood event. Keep in mind a final, important point about flood insurance. If an elevation certification documents that the property is not at flood risk, it may be possible to eliminate the need for a flood policy altogether.
“Alright,” you say. You are still going forward with the purchase of the property and you accept the fact that it’s in a potential flood zone. What’s flood insurance going to cost? What are the implications of carrying the flood policy? Let’s look at the cost part first. The flood zone designation itself will drive the cost of the policy. Higher risk of flooding will equate to more expensive premiums. Once a quote has been obtained for a sufficient policy, we — the lender — will factor the monthly expense of the insurance into your debt-to-income (DTI) ratio. This is why it is vital to understand if flood insurance is a factor as early in the process as possible. If you determine that flood insurance is required and if you qualify with the payment, then the next two considerations are that the flood insurance policy’s annual premium must be paid in full prior to closing AND you must impound your flood insurance payment going forward, even if you do not have impounds on your property taxes and regular homeowner’s insurance.
Because my home base is Marin County, CA, which is coastal California, we do see our share of properties in flood zones. We also have some great relationships with insurance providers who understand flood policies and have access to the carriers outside of the NFIP when and where necessary. They also appreciate that flood insurance can be expensive and is never welcomed news. They work with our clients to place them in the most cost-effective insurance arrangement. Because flood insurance can’t be avoided where it is required by the map, the next best thing is to understand comprehensively how it fits into your mortgage process. We’re here to help you navigate the waters of the flood puzzle.
When the levee breaks,
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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