One of the recent changes to the flood insurance industry is the new proposal to allow FHA loans for private flood insurance.
In this blog, we want to focus on the coverage requirements that you might see now that private flood insurance policies are going to be available for the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), and the United States Department of Veterans Affairs (VA) loans.
New Flood Proposal
We recently talked about this new flood proposal to further strengthen flood insurance options for property owners. The proposal from the Department of Housing and Urban Development (HUD) aims to allow expand the availability of flood insurance options for FHA-insured loans.
Generally, this new proposal that's expected to take effect on December 21st, 2022 will allow the purchase of flood insurance through private insurance companies when previously FHA-insured loans can only get a flood policy from the National Flood Insurance Program (NFIP).
We've detailed this new bulletin in our blog which you can read by CLICKING HERE.
Now, one of the biggest questions to come out of this proposal to allow private flood insurance policies for FHA, USDA, and VA loans is coverage.
Coverage with Private Flood
First, let's have a quick review of the flood insurance coverage you'll get from private insurers compared to the National Flood Insurance Program (NFIP).
Even with the Risk Rating 2.0, a standard flood insurance policy with the NFIP can only offer a maximum of $250,000 and $100,000 in building and content coverage respectively for residential flood policies. This is a different case when it comes to private policies because private insurers don't really have those coverage limits. Generally, this means that you can go above $250,000 for building coverage and $100,000 for personal property coverage.
With private flood, you may see some sufficient protection for your property. Now, that the private flood insurance market is going to be available as an option for your purchase of flood insurance, what does it mean for coverage requirements for your property?
Coverage Requirements with Private Flood
It's important to note however that a lender can require different coverage amounts when it comes to your flood insurance policy.
Currently, when it comes to lenders requiring coverage amount, you might be asked by your mortgagee or bank to insure your property for $250,000 or the amount for the replacement cost of your property or whichever is less between these two. This is generally because FHA loans are following the insurance regulator that's in compliance with the NFIP.
Now, it's important to note here that you are still expected to follow the 80% rule when it comes to the coverage amount regardless if you have a federal or private flood policy. This rule simply indicates that you need to insure your property for at least 80% of its replacement cost.
One of the challenges with flood insurance policies with the Federal Emergency Management Agency (FEMA) is that you can't really go higher than $250,000. This could mean that if the replacement cost of your property is more than that amount, you might need to get a disaster loan if it's available through disaster assistance. If not, you're basically stuck with that coverage amount with federal flood insurance.
With the new proposal happening, you might see your bank requiring you to get more now that you won't have limits with private flood insurance coverages. This could easily mean that if you have a property with a replacement cost of $400,000, you will be able to get full coverage for it with a standard private flood insurance policy.
So, if your bank tells you that you need to get more flood insurance for your property, it's basically the best-case scenario because this would really help you avoid gaps in your flood insurance coverage.
FHA Accepting Private Flood
At the end of the day, this change might be one of the best to come for property owners and homeowners across the state. Being able to get a policy from the private flood insurance market can really help avoid unnecessary flood loss.
Although the potential increase in your coverage requirements can sound scary, it's more important to really make sure that you have the best protection for your property.
If you want to read our full breakdown of this new proposal from HUD, feel free to CLICK HERE to read more about it.
Do you have other questions regarding FHA loans, Private Flood Insurance, or anything flood and insurance related? Click below to access our Flood Learning Center where we try to answer your frequently asked questions when it comes to flood insurance.
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