Do you need to have flood insurance? Should you have flood insurance?
Every homeowner should ask whether he or she needs or wants flood insurance.
- Floods can happen on waterfronts, in low-lying areas, in mountainous areas and in areas that have never flooded before.
- Homeowners and home buyers should have a surveyor tell them whether their home is in a flood zone
- If you are a homeowner, do you want to take the risk of loss from a flood, or would you prefer to insure against that risk?
FEMA, the Federal Emergency Management Agency, mandates the terms of all flood insurance policies, including the annual premium cost, nationwide.
- FEMA also creates and, from time to time, amends maps showing the extent of different kinds of flood zones.
- You can look at the FEMA maps here.
- The most important type of flood zone is the "100-year flood zone". This is the zone for land that is expected to have a 1% chance of flooding every year.
Homeowners can buy flood insurance even if their homes are not in a flood zone, and even if there is no mortage on their home.
- If a home is not in a flood zone, the premium will be lower.
- If a home has no mortgage, no flood insurance is required, and the amount of coverage will be determined by the homeowner's needs alone.
- Condominium associations and apartment buildings can buy insurance on behalf of the homeowners.
If you want a lender to lend you money to buy a home, and the home is in a flood zone, the lender will require that the homeowner protect the lender from loss from a flood by buying sufficient flood insurance to cover the mortgage.
- Flood insurance pays for the replacement of the first-floor exterior of a flood-damaged house.
- It does not cover second and higher stories or contents and personal property.
Flood insurance does not necessarily protect a homeowner's equity - the value of a home after the mortgage is paid off - because a flood could change the value of a property even if the home is completely rebuilt.
Nevertheless, homeowners need to evaluate and analyze their risk and decide whether they should buy insurance that will allow them to rebuild their entire home.
- If a flood damage claim is made against a policy, the rate will not change the next year simply because of the loss because the rate will continue to be the FEMA-mandated rate
Lenders use flood certification companies to advise them on whether a home is in a flood zone.
- Flood certification companies just "read the FEMA map".
- If the bank's appraiser says that, based on the flood certification company's evaluation, a home is not in a flood zone, the lender will normally accept the appraiser's word and will not require flood insurance.
If there is any question about whether a home is in a flood zone, a surveyor should be called in to provide an elevation certificate.
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If the elevation certificate shows that the home is not in a flood zone, it will be used to convince the flood certification company and the lender that flood insurance is not required.
- It is often the case in my area that the lender will accept the elevation certificate and close the loan.
- However, what lenders should be doing, and may very likely do in your area, is to file a Letter of Map Amendment (LOMA) with FEMA, which must review and approve the change to the FEMA map to remove the home from the flood zone.
- That process can take 6-8 weeks, so it has the potential to affect the closing date.
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Normally, the LOMA process relies on the information on the elevation certificate, and the FEMA map amendment takes place in due course and without much difficulty.
- Since lender practices appear to vary, homeowners should be aware that a lender might require FEMA approval of a LOMA before agreeing that flood insurance is unnecessary.
- In some cases, the lender might still require flood insurance, even though the property is not in a FEMA flood zone, based on the particular circumstances of that property.
What sometimes gets lost in the discussion of insurance costs is that the reason you need insurance is that there could be a flood!
- Don't get a surveyor just so you can avoid the cost of insurance:
- Get a surveyor to help you evaluate and lower the risk of loss from an actual flood.
If your home needs flood insurance so you can qualify for a mortgage, your insurance company will tell you the FEMA-mandated premium applicable to your property.
The cost of flood insurance is rising because the FEMA rates have historically been too low relative to the actual risk of loss from floods.
- In addition, climate change is increasing the risk and the severity of floods.
- There is considerable debate about the how the real risk of flood damage should be calculated and how that risk translates into premiums.
Congress is reassessing the implementation of the flood insurance program.
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One proposal with considerable support in Congress would phase in a new program. It would allow FEMA
- two years to "get the numbers right" and properly assess the actuarial risk of floods, and
- two more years to implement the program and policies across the country.
There is a uncertainty involved in evaluating risk! Evaluating flood risk in every corner of the country is a very complicated process. There is certainly room for criticism and improvement at every stage of the process methodology that ultimately leads to individual insurance rates.
When you are buying a home anywhere in the country, make sure you use a Realtor who understands flood insurance and can help guide you through the process of properly safeguarding your investment in your new home.
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