Lender-Required Flood Insurance: What You Need to Know

Floods are among the top natural disaster threats to homes because of their increasing frequency, potential for devastating consequences, and the growing costs to repair their damage. So if you finance the purchase of a home in a high-risk flood zone with a mortgage backed by a federal agency, your lender will require you to purchase flood insurance.

It’s time to get smart about the basics of flood insurance, when it’s required, coverage details and cost, and ways to reduce the need for it.

Key Takeaways

• Flood insurance is required by lenders of federally-backed mortgages for properties in high-risk flood zones.
• Most homeowners’ insurance policies do not provide you with flood insurance.
• The cost of coverage depends on various factors, such as the type of zone your house is in, the elevation of the property, and the amount of coverage.
• Flood insurance covers damage to property and its personal contents.
• You can reduce the cost of flood insurance, or your need for it, by buying a property in low- to moderate-risk flood zones or completely outside of any flood zone.

What Is Lender-Required Flood Insurance?

Certain mortgage lenders mandate flood insurance to limit your financial exposure (and their risk) to flood-related damage to your property. Your mortgage lender may require you to purchase flood insurance if your property is in a specially designated flood zone.

Standard home insurance usually doesn’t cover damage from flooding but lenders want to protect their investments. This is why they generally don’t approve mortgages until this insurance requirement is met for properties in flood zones.

The government identifies these zones as special flood hazard areas deemed high-risk. They can be located on Flood Insurance Rate Maps, which are available free of charge through the Federal Emergency Management Agency (FEMA).

When Is Flood Insurance Required by Lenders?

Mortgage lenders require you to purchase a flood insurance policy if your property is in a high-risk flood area identified by FEMA and you have a government-backed mortgage. These include mortgages that are:

• Insured by the Federal Housing Administration (FHA)
• Backed by Fannie Mae and Freddie Mac
• Guaranteed by the Department of Veterans Affairs (VA)

Some lenders may require flood insurance even if the property isn’t in a high-risk area. Even certain private mortgage lenders may require that you buy flood insurance.

Important

You can take out a flood insurance policy if you own or rent a home or condo. You can also purchase coverage if you own or rent commercial property.

How Flood Insurance Works

Flood insurance is different from typical homeowners insurance. Homeowners insurance is designed to cover damage to your home from natural causes like fire and wind, as well as theft.

Accidental water damage may be covered but only under certain circumstances, such as sudden pipe bursts.

Flood insurance, on the other hand, is special coverage that homeowners obtain if they live in areas that are deemed at high risk of flooding. It covers damage from flooding, rising waters from heavy rain and rivers, and storm surges.

Homeowners who are required to take out flood insurance can purchase policies from insurance companies or through the National Flood Insurance Program (NFIP), which offers government-backed policies.

Filing a Claim

Should a flood occur, you can file a claim for damage by following these steps:

1. Contact your insurance company, describe the damage, and then separate damaged from undamaged property in advance of the adjuster’s visit.
2. Take photos of your damaged property. These should include shots of discarded objects, structural damage, and standing floodwater levels.
3. In addition, list your damaged (or lost) items. Alongside that information, note down their purchase dates and values. Attach the receipts for them, if you still have those.
4. Finally, you will need to complete and sign a Proof of Loss document, which the adjuster can provide. This is your sworn statement concerning your claim. The insurance company (or the NFIP) needs this document to process your claim payment.

Make sure you keep the insurer’s phone number and your policy number in a safe and readily accessible location so you can access it quickly and easily after a flood.

23,000

The approximate number of communities that participate in the National Flood Insurance Program.

Determining Flood Risk

People commonly believe that floods occur near coastlines or bodies of water (such as a river or lake). While that’s true, floods can happen anywhere and at any time, such as after very heavy rainfalls, when drains back up, or when there is construction in the area of a property.

One of the best ways to determine the flood risk for a potential property is to look at the appropriate flood map at FEMA’s online Flood Map Service Center before you buy, according to insurance expert witness Lezlee Liljenberg.

“Oftentimes, the realtor or mortgage person does not look at this and many times not until way too late in the transaction to be able to change course,” Liljenberg said. Doing your research ahead of time can save you money in the long run.

You can determine your risk by pulling up the map for the property address at the Service Center. Zone designations include a color, a letter, and a risk level.

The chart below provides information about zones and risk levels.

Cost of Flood Insurance

Flood insurance can range from a few hundred to thousands of dollars, according to Liljenberg. How much you pay depends on several factors:

• The flood zone
• The elevation of your structure
• The type of structure on your property, including how it’s constructed, its age, and whether it’s occupied
• The limits of your coverage (greater coverage means higher premiums)
• The amount of your deductible (higher deductibles typically mean lower premiums)

“Flood policies are due at one time so this can be a huge shock when discovering you are in a flood zone,” Liljenberg added.

To address this, FEMA is making changes to allow policyholders to pay for their flood insurance in monthly installments.

Note

According to FEMA, the median current cost of flood insurance for a home as of 2023 was $786.

Coverage Details

Flood insurance coverage under the NFIP protects your property and its contents against losses related to flooding.

Homeowners are covered for up to $250,000 for the property and up to $100,000 for personal property while business and multi-family content and building repair coverage covers up to $500,000 in damages.

The table below highlights what’s covered in each category:

Keep in mind that the land on which your property stands isn’t covered by a flood insurance policy.

Private insurers also offer flood insurance with higher limits and a wider range of coverage options. Check with your lender to see if your preferred carrier qualifies.

Options to Reduce or Avoid Lender-Required Flood Insurance

Flood insurance can add to your home-related costs. But, you have options if you want to reduce or avoid taking out a special policy to cover floods. Consider the following:

• Look for a property that isn’t in a flood zone.
• Look at zones with low to moderate risk (where flood insurance may be optional).
• Review the flood map and challenge your lender if your findings don’t match up with theirs.
• Get a letter of map amendment, which waives lender requirements if the property is outside the Special Flood Hazard Area. 

You can also buy your house with cash instead of financing the purchase—no lender means no requirement.

Again, though, your home insurance policy may not cover any damage from flooding, which means you’ll be on the hook to cover the cost of repairs or replacement due to flood damage.

The Bottom Line

The requirement to purchase flood insurance can catch property buyers off guard. But you’ll need it if you’re financing the purchase of a home with a government-backed mortgage. Some private lenders may even require it.

Check with your lender and review the applicable flood map if you’re unsure about your property’s flood zone status and the need to buy flood insurance.