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You're not alone in your flood insurance loan.
Today we're going to discuss the different loan types and see how does the loan type impact your flood insurance options. We'll also cover some of the recent changes that took place with loans and how they're going to impact the relationship between loans and flood insurance policy.
Different Types of Loan
FHA
The Federal Housing Administration (FHA) loan is done through the government which is generally great for first time home buyers. This also has certain restrictions when it comes to income, debt to income ratio, and certain credit scores like most loans do.
VA
The Veteran Affairs (VA) loan which is dedicated for veterans or persons who served the country through the military, navy, or air service. This is very beneficial for veterans who are looking to buy themselves a house, but this also comes with certain restrictions to qualify. Yes, this is also under the government.
USDA
The United States Urban Development Administration (USDA) loan is government-backed loan that's generally dedicated for rural areas, and comes with both income and area restrictions in order to qualify. This gives people in a rural community to have opportunities to grow and get access to different loan types.
Conventional Loan
Now, you might be wondering why I kept on emphasizing the "government loan" phrase for these first three loans and this is why. Conventional loans are more like traditional loans which have higher down payment and generally has different qualification restrictions compared to the FHA, VA, and USDA loans. These are loans provided by a company who aren't government-backed which can be easier to get since you really won't have to go through all the red tapes and whatnots.
What Changed?
Previously, if you have a government loan like the three we mentioned before, your bank will require you to go through the National Flood Insurance Program and FEMA in order to purchase flood insurance. This is the only flood insurance policy you can get with those loans up until July 1, 2019. If you're doing a conventional loan, then you get the option of either the NFIP or through Private Flood Insurance.
However this changed on July since the Federal Deposit Insurance Corporation (FDIC) passed a law that banks can and should now accept Private Flood Insurance through the government-backed loans. This in turn made sure that these three won't be designated loans for the NFIP and FEMA flood insurance policy only.
What's In It For You?
Well, since basically there's no more restrictions on what flood insurance you can get through your loan, you can now purchase flood insurance from either federal flood insurance through the NFIP and FEMA or through Private Flood Insurance from any Private Insurance Company which offers it.
Like I'd always say, it's definitely better to have an option than no option at all.
Generally, federal flood insurance premiums can really be more expensive than some private insurance premiums. What happens is that when people get the NFIP policy that they need, it will throw off their debt to income ratio, so they typically won't qualify for the house they're trying to buy. This is something to also expect since the NFIP constantly updates their Flood Insurance Rate Map (FIRM), but now you get to avoid it.
On the other hand, the private flood insurance would use different means and technology in order to help in qualifying a customer. This can range from 50% up to 70% less than the flood insurance premium that the NFIP will offer. It's important to note for real estate agents who are helping their clients buy or sell a house or you as a homeowner yourself to have a proper understanding and management of these designated loans for the placement of flood insurance. Now that this new law gives more option with the type of insurance you'll get for your property through these loans, you won't be stuck in one option.
Like we mentioned in our previous episodes, the private flood market isn't something to be scared of since they can provide equal flood insurance coverage, if not more, for policyholders. These includes higher coverage for building and property, contents, and even additional living expenses which the National Flood Insurance Program can only provide after the president declares a state of emergency or disaster when there's natural disaster.
This can also help your financial situation since you won't have to be contained in high flood insurance rates because the private flood can also be purchase from different private companies who offer them. Flood insurance claims are something that I personally have seen get paid both sides with no shade of inconvenient time for the policyholder.
Before, it's a major headache for homeowners when dealing with flood insurance requirements, flood zone hazard determination, and generally being in high-risk areas or special flood hazard area since these are the things that directly impact rates negatively. You can know more on private flood by checking on our previous episode from the podcast:
As you can see, not all change is bad. This might just be one of the most helpful laws passed when it comes to insurance in general and disaster relief assistance. Changing FHA, VA, and the USDA to no longer be designated loans for the NFIP only can really be helpful since it's pretty understandable if homeowners want to purchase policy in a short period of time.
Remember, we have an educational background on flood mitigation. If you have any questions on how to use these loans for your flood insurance, risk of flooding in your area, flood hazard determination, how to use the type of loan you have for flood insurance, how base flood elevation affects your rate, or anything about flood, please reach out to us by checking on our links below:
