Flood insurance is required for properties in special flood risk areas in the US, especially if improvements are financed by a federally regulated lender. The requirement protects the lender and federal government. The Flood-Disaster Protection Act of 1973 and National Flood Insurance Reform Act of 1994 established these requirements. A property in a special flood risk area has a 1% chance of flooding every year. Prospective buyers can consult a flood insurance rate map or a lender to determine if there is a flood insurance requirement.
A flood insurance requirement is a mandate that an owner of an improved land has flood insurance, especially if the improvements are financed by a federally regulated lender. This requirement generally only applies to properties that are particularly susceptible to flooding. In the United States, this is a requirement when a property is located in a special flood risk area. The flood insurance requirement is intended to protect the lender, as well as the federal government, which could ultimately guarantee the loan or be adversely affected by a default.
The history of flood insurance requirements for government-backed mortgage programs in the United States began in the 1970s, with the Flood-Disaster Protection Act of 1973. That act was followed by the National Flood Insurance Reform Act of 1994 The provisions not only require flood insurance for federally guaranteed loans, but also any other federally funded program used for the purchase, construction, repair or improvement of a home or building in a 100-year-old floodplain.
Any home within a special flood risk area is known as being in a 100-year floodplain. This doesn’t mean that a flood occurs once in a hundred years, but it is simply a way of saying that there is a 1% chance that a flood could occur on the property every year. In general, a property in a special flood risk area has a flood insurance requirement because flooding is the most likely of all disasters.
Those hoping to save money on a home by forgoing flood insurance may find they have no choice if they’re looking for a special flood risk area. The only way to avoid paying for flood insurance is to buy with an owner-financed contract or pay cash outright for the home. If the area is prone to flooding, even in an owner financing situation, the homeowner may require flood insurance. Leaving flood insurance after insuring the loan could expose the buyer to penalties up to and including home forfeiture.
To determine if there is a flood insurance requirement for a particular package, prospective buyers can consult a flood insurance rate map provided by the Federal Emergency Management Agency. A city or county housing office may also be able to provide this as a resource. If not, a lender will inform the buyer of the requirement before closing the loan.
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