Special offer

Do you need to have flood insurance? Should you have flood insurance?

By
Managing Real Estate Broker with Brad MacKenzie

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.

  • 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.
  • 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.

  • 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.

 

Comments (34)

Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

This is a great "tutorial" on flood insurance for home owners/buyers and I'm going to reblog it. Thanks for such a great post!

Nov 23, 2013 08:30 PM
Brad MacKenzie
Brad MacKenzie - Duxbury, MA
Turning Houses into Homes on the South Shore

Thanks, Nina! Your Charlotte clients will appreciate you all the more for it!

Nov 23, 2013 09:34 PM
Brian Schulte
Allison James Estates & Homes - Sierra Vista, AZ
SFR, Sierra Vista, AZ

During a short span I sold 2 homes on the same Wash (where water runs when it actually rains - looks like a dry riverbed otherwise).  One home had a previous flood certification and the other home did not. The certifier had to do it twice; they may have used the wrong marker for the 1st one. So even the professionals have to double check their own work.

The reason the 2nd home needed a certification was that the buyer did not qualify for the home without it.

Nov 23, 2013 09:38 PM
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Brad, good over view of the Flood Insurance Program. Although needed, the high premiums will hurt a lot of homeowners and limit their chances for selling their property.

Nov 23, 2013 10:08 PM
Howard Weiss
Fathom Realty - Arlington, TX
Arlington & DFW, TX

Lots of good information here but some misleading information as well.  A surveyor is NOT the authority on telling a lender whether a structure is in a flood hazard or not.  The lender uses a third party determination company to read the FEMA map and inform them if any portion of the structure is in a flood hazard.  Example:  The third party determination company concludes that all or a portion of the structure is in a flood hazard zone per the FEMA map.  The borrower hires a surveyor to perform an elevation certificate that shows that the structure is actually above the elevation of the 1% annual flood area.  Flood insurance is still required because the controlling document is the FEMA map which the flood determination vendor utilized.  A surveyors elevation study cannot provide a waiver of the federal flood insurance requirement.  Also, a lender is prohibited by FEMA policy to waive the flood insurance requirement based on an appaisers determination.  It's just important for people to have the accurate information.  It's partially accurate information such as this that gets home buyers very upset when a lender will not waive their flood insurance when a surveyor is providing them with info stating they don't need it.  Lenders are often looked at as the bad guy when they are doing the right thing.

Nov 24, 2013 12:36 AM
Brad MacKenzie
Brad MacKenzie - Duxbury, MA
Turning Houses into Homes on the South Shore

Greg, what you are saying is not accurate. An elevation survey that shows that the structure on a property is not in the flood zone means that flood insurance is not required. The WHOLE POINT of the surveyor's elevation survey is to get someone out to the property to look at a situation where the map is not clear or is inaccurate with regard to a particular structure. 

There are LOTS of homes here that appear to be in the flood zone that do not need flood insurance because they have an elevation certificate showing that, even though the FEMA map appears to place the home in the zone, in fact, it is not in the flood zone.

No matter who reads the map - a surveyor, an appraiser, or any third party - The FEMA map does not control whether flood insurance is required.  The elevation survey does.

Also, you wrote, "a lender is prohibited by FEMA policy to waive the flood insurance requirement based on an appaiser[']s determination", but you don't say why. The reason is that the appraiser isn't a surveyor, and the appraiser has done nothing more than look at the map. A situation where there appears to be conflicting information is precisely the case where a survey is needed. Appraisers only read the FEMA maps. They are not competent to provide the exculpatory information that the survey provides.

Nov 24, 2013 03:14 AM
Les & Sarah Oswald
Realty One Group - Eastvale, CA
Broker, Realtor and Investor

Very educational blog about flood insurance. We do have pocket of areas in Southern California where flood insurance is mandated. Will be re-blogging this post.

Nov 24, 2013 04:15 AM
Howard Weiss
Fathom Realty - Arlington, TX
Arlington & DFW, TX

All due respect, Brad - what I said is accurate.  The FEMA map IS the determining factor as far as the flood insurance requirement goes.  If the FEMA map shows a portion or all of a structure in a shaded flood hazard area, flood insurance is mandatory, bottom line.  A surveyor can shoot the elevations and possibly determine that although the FEMA maps shows the structure in, 2 dimensionally on a flat map, it is actually above the base flood elevation.  If this is the case, the lender still cannot waive the mandatory flood insurance.  The elevation certificate can however be utilized to apply to FEMA to have the flood map amended.  If, and only if FEMA amends the flood map and removes the structure from the flood hazard, can the lender remove the flood insurance requirement.  The elevation cert can show the structure 10 feet above the BFE but the lender can still not waive the flood insurance requirement.  So yes, the FEMA map calls the shots, and the surveyor can only provide documentation that would enable someone to have a map corrected by FEMA themselves.

 

The reason the lender cannot waive the flood insurance based on the word of an appraiser is because they are bound by what their flood determination vendor reports based off the flood maps.  An appraiser is not held to their determination.  A FEMA certified flood zone determination vendor is insured and stands behind their determination.  Again, the surveyor is not coming into play in that decision.

 

Some of this info has stuck with me after 14 years as a Certified Floodplain Manager.

 

Nov 24, 2013 10:10 AM
MichelleCherie Carr Crowe .Just Call. 408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

The hardest part is for folks who had no idea they had any flood risk until FEMA "re-mapped" areas and they now find themselves in a flood zone.

Nov 24, 2013 10:49 AM
Brad MacKenzie
Brad MacKenzie - Duxbury, MA
Turning Houses into Homes on the South Shore

Greg, I hear you but, if what you say were true, flood elevation certificates would be pointless. No one would shell out good money ($550-1,000) if it wouldn't help them avoid buying the insurance. While what you say is contrary to my experience and normal practice in this area, I'll leave your comment for people to read. People who are questioning whether their home needs flood insurance should ask their lender whether Greg is right. To be specific, the question you, as a potential buyer of flood insurance should ask is,

"If I do an elevation survey on this home I want to buy that appears, from looking at the FEMA map, to be in, or potentially in, a flood zone, and the elevation survey shows that the home is out of the flood zone, will I be required to buy insurance in order to get a mortgage?".

If the answer you get is yes, please call me.

Nov 24, 2013 11:21 AM
Brad MacKenzie
Brad MacKenzie - Duxbury, MA
Turning Houses into Homes on the South Shore

To be sure, Michelle. That is a great burden, and there is justifiable concern that people might walk away from their homes because they can't afford the insurance. 

Nov 24, 2013 11:24 AM
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

This is really good, thorough information on a hot topic, Brad.  It's not as big an issue in Silicon Valley as it is on the east coast, although we do have property near the San Francisco Bay and some creeks.  Out here we have optional earthquake insurance; it's not required by lenders.  Most young buyers think the government will bail them out in the event of catastrophic loses.  Did that happen after Sandy for owner-occupants?

Nov 24, 2013 02:42 PM
Howard Weiss
Fathom Realty - Arlington, TX
Arlington & DFW, TX

Why would one pay for an elevation certificate?

A: Purchase the elevation certificate in order to see if the home is eligible to be removed from the flood hazard by FEMA via a LOMA.  So no, they are not pointless.  Paying $500 one time to aid in getting the home removed from the SFHA is much cheaper than paying for flood insurance year after year.

B: If the lender is requiring flood insurance, the borrower will be required to get an elevation certificate any way so the policy can be rated properly.  Without an elevation certificate the policy could only be written at a much more expensive “Zone A” rate.

Here is a short excerpt from FEMA's "Mandatory Purchase of Flood Insurance Guidelines"

"A property owner
may submit property and elevation materials
in support of a request for a LOMA to
remove the property from the SFHA. This
process involves the property owner and
FEMA.
Nevertheless, until the map is physically
amended or revised, lenders are bound by
the information shown on FEMA maps
unless a LOMA has been issued by FEMA
for the building. Lenders may not close a
loan on the basis of a guarantee or
indemnification from a flood vendor or other
third party as a substitute for a LOMA."

Every buyer needs to have accurate information if they encounter a case where mandatory flood insurance is brought up by their lender.

Nov 24, 2013 02:46 PM
Brad MacKenzie
Brad MacKenzie - Duxbury, MA
Turning Houses into Homes on the South Shore

Thank you Greg. I looked into this and amended my post as necessary. Lenders here regularly close loans without a LOMA, on the basis of the elevation certificate alone. I appreciate your additional information on what FEMA guidelines actually require, even though the guidelines appear to be honored in the breach. I learn something every day.

Nov 24, 2013 08:17 PM
Pat Champion
John Roberts Realty - Eustis, FL
Call the "CHAMPION" for all your real estate needs

Great information for all home buyer's to read as a home buyer you need to be well educated on all factors before purchasing a home. Thanks for sharing.

Nov 25, 2013 04:06 AM
Patricia Kennedy
RLAH@Properties - Washington, DC
Home in the Capital

Brad, flood zones are constantly being re-drawn.  And even if you are not in a flood zone (like me) your basement can flood and create a little havoc.  I have a drain by my back basement door that sometimes gets clogged with leaves, and guess what?  If the drain stays clean, I'm fine.  If not, I might as well be on a 1-year flood zone.

Nov 25, 2013 07:50 AM
Brad MacKenzie
Brad MacKenzie - Duxbury, MA
Turning Houses into Homes on the South Shore

Ha, Pat, a one-year flood zone! Your poor basement!

Nov 26, 2013 01:14 AM
Jimmy Faulkner
Florida. Homes Realty & Mortgage - Wantagh, NY
The Best Of St. Augustine

Hurricane Sandy should be A grim reminder that water damage does happen and you never know who is next. Always have flood insurance.

Dec 08, 2013 10:04 AM
Sondra Meyer:
EXP Realty, LLC - Corpus Christi, TX
See It. Experience It. Live It.

This is a very informative post.  

 

Jan 01, 2014 04:34 AM
Anonymous
Mark Jackson

While this is a old post I hope to have some input on this situation. FEMA had placed a group of properties in a 100 year flood plain. Owners of those lot had clauses placed in their Deeds , Subject to the 100 year flood plain.
FEMA then went back and redrew the flood plain and those affected properties were removed from the 100 year plain. This left owners with legal clauses and description that were no longer true. I placed and received a LOMA stating that all of my property was in zone x.

When I started the process , and explained the situation, I was told by FEMA that the letter of amendment was binding on local governments etc.
When someone buys a piece of property they review the Deed or at least they should. If I were a realtors client that would most likely be a disqualifier to a potential buyer. So the Deed needs to be corrected. Produce the LOMA and the old Deed and have a new one executed. Seems simple but not so. Title company says they have seen properties added to flood zones but never removed. This is even after providing the LOMA. It appears to me , that based on this situation, the affected party is incurring legal expense to fix something they did not effect. Now calling FEMA they quote from a script and can't even answer just how legal and binding the LOMA is.

FEMA does not tell affected properties the zone has changed. Changing a legal document is not so easy. Title companies do not research flood plains. They simply parrot what is already in a Deed. A lesson to buyers is not to accept what is in a Deed simply because someone says so. As time goes by stipulations of various degrees can affect the use and value of property . It is common here to see Deeds that still reference to lot lines as to "such and such peach tree".

Opinions welcome on how to remove erroneous Deed language.

Sep 19, 2019 09:38 AM
#35