You know what you're looking for in a home: Location, of course. Top-notch schools, convenient shopping and entertainment, and a low crime rate often push to the top of most lists. Here's another part of the equation you might not have thought about – what's the flood risk?
It matters. If your mortgage comes from a federally insured lender – most do – and the home you want to buy is in a high-risk flood area, the lender will require you to buy flood insurance in addition to homeowners insurance. That's because standard home insurance typically doesn't cover damage from flooding.
What's a high-risk area?
Under the National Flood Insurance Program, an area is considered high risk if there's at least a one in four chance of flooding during the typical 30-year mortgage term.
Coastal areas qualify, of course. So do communities along rivers and lakes. Click here to see the Federal Emergency Management Agency's flood maps; FEMA managers the National Flood Insurance Program.
What about moderate-to-low flood risk areas?
So the home you want to buy is in a moderate-to-low risk zone instead of a high-risk one. Does that mean you can forget about buying flood insurance? Not exactly. Your lender could still require you to buy the insurance if it believes there's a good chance of flooding.
That might not be such a bad thing. Here's a surprising statistic: Each year, an average of 26% of flood losses come from areas not deemed flood zones, according to the Insurance Information Institute (III). Flooding can happen almost anywhere.
Why you might want to buy flood insurance anyway
For five days in September 2013, parts of Colorado received about 20 inches of rain (roughly equaling annual rainfall totals in a typical year). The week proved devastating, destroying homes and roads with an unprecedented flood force, killing at least eight people, and inciting damages of more than $1 billion. Residents with destroyed homes called their home insurance agents only to find that their policies didn't cover flood damage.
Less than 1% of residents in Colorado, about 22,000, had flood insurance, according to the Federal Emergency Management Agency (FEMA). In fact, only about 13% of all Americans held a flood insurance policy in 2012.
Meanwhile, flooding across the country increases. As of October 2013, the Federal Government had declared 37 major flood disasters, compared to only 19 the year before. And remember, Superstorm Sandy in late 2012 caused $19.8 billion in insured losses. Floods also have become more difficult to predict. Of the 28 states affected by flood disasters declared so far in 2013, only 9 were listed as states most likely to suffer a major flood.
The lesson from Colorado, and Sandy before that, and Hurricane Katrina before that: Check flood maps in your area to find out if your home is located in or near a floodplain. Even if it isn't, consider purchasing a separate policy.
How much will flood insurance cost?
Pricing for flood insurance is in flux right now; some policies for homeowners in floodplains and coastal areas could face big premium increases as the federal program removes subsidies and moves toward sustainability. Some of those increases could be delayed by Congress, but most expect they ultimately will be passed along to homeowners.
But policies outside those areas can be affordable; contents-only coverage in low-to-moderate risk areas can start at as low as $129 per year, depending on coverage limits. Remember, however, that it takes 30 days for a flood policy to go into effect. You can't wait until a threat looms.
Should you buy flood insurance? Your lender gets first crack at that decision. But even if it doesn't require a policy, you should consider one – as well as the potential consequences of not buying one.
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