Flood insurance can be confusing for anyone but especially if you don't deal with it everyday. When it comes to mortgage companies it's not unusual for underwriters to be the only ones that deal with this issue on a daily basis.
We want to talk about three things loan officers should know when it comes to flood insurance.
- Flood zones
- Flood insurance options available
- Policy transfers
As you can imagine flood insurance can have a big impact on things like debt to income ratios. It's not uncommon for flood insurance to stop a buyer from purchasing a property. Sometimes the buyer either can't afford it or buying in a special flood hazard area just scares them. It's important to understand when flood insurance is required and when it isn't. We are going to discuss which flood zones require flood insurance and which ones don't.
- Flood zone X
- Flood zone A
- Flood zone AE
- Flood zone V
- Flood zone VE
While these are not all the flood zones they are the most common types.
So which ones require flood insurance and which ones don't?
Let's start with flood zone X this whats called a minimal risk area where flood insurance is not required. This zone does normally offer the best flood insurance rates because it is a lower risk.
Flood zone A and AE are both in whats called the 100 year flood zone. If a mortgage is being carried flood insurance will be required in these zones. The difference between these two zones is normally zone A does not have a base flood elevation.
Flood zone V and VE are going to be coastal areas that are at risk of tide flooding. These two zones will also require flood insurance and will normally have the highest rates because of the distance to water.
So now we know when flood insurance is required and when it is not what options are available?
There are basically two flood insurance available but they are not available to everyone.
The flood insurance options really depend on the type of loan the customer is doing. As of July 1, 2019 the FDIC passed a law allowing private flood insurance on all loan types accept for FHA loans. As long as the private flood insurance meets the same requirement as the National Flood Insurance Program.
Lets talk about some differences in these options. First we will discuss the residential coverages with a National Flood Insurance Program policy.
National Flood Insurance Program
The National Flood Insurance Program is the FEMA program or government funded flood insurance program. No matter where you go for coverage rates should be the same. When it comes to building coverage they max out coverages at $250,000 and a $100,000 on contents. There is no additional living expenses provided under the National Flood Insurance Program. Because of the way rates are determined the National Flood Insurance Program can offer some pretty high rates. So what is the other option?
Private Flood Insurance Program
Private flood insurance is backed by private insurance companies who set their own rates based on multiple factors. They use some different technology that can help reduce flood insurance rates by more than 40%. Unlike the National Flood Insurance Program they do not limit building coverage to $250,000 or contents coverage to $100,000. Private flood insurance also offers additional living expenses so if your home floods you could have a temporary place to go while it is prepared.
Now that we know what flood insurance options are available lets discuss the third thing that loan officers should know when it comes to flood insurance.
So what is a policy transfer?
A policy transfer is when a flood insurance policy is transferred from one buyer to the next.
What are some benefits to doing this?
Let's say that the current property owner has had this policy for several years on a flood zone that is no longer available. Then this would be what is called a grandfathered policy.
By doing a policy transfer in this situation it guarantees that this rate will continue as long as the policy does not lapse at all.
Another benefit to doing a policy transfer is how easy it is, there usually is just one sheet of paper the buyer and seller has to pay.
You could also be in the situation like I was many years ago where I had already paid the flood insurance up front, so the new buyer did not have to pay any flood insurance premiums until renewal.
As you can see understanding what a policy transfer is and its benefits is very important.
We have talked about flood zones, flood insurance options, and policy transfers and how its important for the loan officers to understand these three things. Understanding these three things can help save headaches when that file gets to the underwriters desk.
Maybe you have additional questions about these three things or your buyer has additional questions then make sure to visit our website. You can also check out our daily flood education videos on our YouTube channel or our Facebook page. You can also check out our podcast.