Federal law decides this one, and the flood map decides it for each house. If the building sits in a Special Flood Hazard Area (SFHA) on FEMA's flood maps and your mortgage is federally backed or comes from a federally regulated lender, flood insurance is required before closing and for as long as you have the loan. That covers FHA, VA and USDA loans and Conventional loans sold to Fannie Mae or Freddie Mac.
Who requires flood insurance and why
FEMA maps the areas with at least a 1% chance of flooding in any year, often called the 100-year floodplain. Those are the Special Flood Hazard Areas, and their zone names start with A or V (A, AE, AH, AO, V, VE and similar). Zones B, C and X are moderate or low risk.
Early in the loan process your lender orders a flood zone determination on the property. If the home is in an SFHA, the lender must tell you in writing before closing, and you'll need a flood policy in place at the closing table. A standard homeowners policy doesn't cover rising water, so flood coverage is always a separate policy, from the National Flood Insurance Program (NFIP) or a private flood insurer.
Florida adds its own rule for one group. Under section 627.351 of the Florida Statutes, Citizens Property Insurance Corporation homeowners policies that include wind coverage must also carry flood insurance in any flood zone, under a requirement phased in by home value until it reaches every Citizens residential policy. Buyers who can't place wind coverage anywhere but Citizens should plan for a flood policy even outside an A or V zone.
How much coverage the lender requires
The federal minimum is the lesser of two numbers: the loan balance or the most the NFIP will insure for that building, which is $250,000 for a home. Coverage can't exceed what the building itself would cost to rebuild, since flood insurance covers the structure and not the land. FHA's handbook describes the same idea as the loan balance less the estimated land value.
Take a $340,000 home bought with FHA and 3.5% down. The base loan is $328,100, and the 1.75% upfront mortgage insurance premium of $5,741.75 brings the loan to $333,841.75.
| Coverage test | Amount |
|---|---|
| Loan balance | $333,841.75 |
| NFIP maximum for a home | $250,000.00 |
| Required building coverage (the lesser) | $250,000.00 |
If the structure's replacement cost is $210,000, that becomes the ceiling, because you can't insure more than the building is worth to rebuild. Lenders don't require coverage for your belongings, though you can add it.
How the premium shows up in your payment and approval
Federal law has regulated lenders collect the flood premium monthly through your escrow account, alongside property taxes and homeowners insurance. The lender counts it as part of your housing payment when it figures your debt-to-income ratio. Under FHA's automated limit of about 46.9% for housing, every $100 a month of flood premium raises the income you need by $213.22 a month ($100 ÷ 0.469).
Take a $300,000 home with FHA at 3.5% down and a 5.75% rate: $1,719.01 principal and interest, $132.69 mortgage insurance, $225.00 property taxes (0.90% a year) and $283.00 homeowners insurance make a full payment of $2,359.70, which needs $5,031.34 a month of income. Add a $100 monthly flood premium and the payment becomes $2,459.70, which needs $5,244.56 a month. Premiums under FEMA's current rating method are set for each building, based on factors such as elevation, distance to water and rebuilding cost, so get a quote during your inspection period, not at the end.
An NFIP policy normally has a 30-day wait before it takes effect, but that wait doesn't apply when the policy is bought in connection with making a new loan, so it won't hold up your closing.
Ways to lower the cost or remove the requirement
- Look up the address on the FEMA Flood Map Service Center before you make an offer.
- Ask the seller for an elevation certificate. A home built above the base flood elevation often prices lower.
- Compare an NFIP quote with a private flood quote. Lenders must accept a private policy that meets federal standards.
- If the house sits on natural high ground that the map missed, apply to FEMA for a Letter of Map Amendment. If FEMA approves it, you can ask your lender to remove the federal flood insurance requirement.
Add the flood premium to the insurance line in the mortgage payment calculator to see the full monthly cost. When the home you want sits in an A or V zone, call AAA Capital Funding at 888-601-8344 and we'll pull the flood zone, run the payment with the premium included and confirm your approval before your inspection period ends.