Mandatory Purchase Requirement
National Flood Insurance Program
The National Flood Insurance Program (NFIP) is a federal program that enables property owners in participating communities to purchase flood insurance on eligible buildings and contents, whether in or out of a floodplain. This community participates in the NFIP, making federally-backed flood insurance available to its property owners.
The NFIP ensures most walled and roofed buildings that are principally above ground on a permanent foundation, including mobile homes and buildings in the course of construction. Property owners can purchase building and contents coverage from any local property and casualty insurance agent. To find a local insurance agent that writes flood insurance in your area, visit FloodSmart.
Mandatory Purchase Requirement
Pursuant to the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994, the purchase of flood insurance is mandatory for all federal or federally-related financial assistance for the acquisition and/or construction of buildings in Special Flood Hazard Areas (SFHAs). An SFHA is any A or V flood zone on a Federal Emergency Management Agency (FEMA) Flood Insurance Rate Map (FIRM).
The mandatory purchase requirement also applies to secured loans from such financial institutions as commercial lenders, savings and loan associations, savings banks, and credit unions that are regulated, supervised, or insured by federal agencies, such as:
- Comptroller of Currency
- Fannie Mae or Freddie Mac in the secondary mortgage market
- Farm Credit Administration
- Federal Deposit Insurance Corporation
- Federal Reserve
- National Credit Union Administration
- Office of Thrift Supervision
Federal Financial Assistance Programs
Federal financial assistance programs affected by the laws include loans and grants from agencies such as:
- Department of Veterans Affairs
- Farmers Home Administration
- Federal Housing Administration
- FEMA disaster assistance
- Small Business Administration
How It Works
When making, increasing, renewing, or extending any federally backed loan, lenders must conduct a flood zone determination using the most current FEMA Flood Insurance Rate Maps (FIRM) to determine if any part of the building is located in an SFHA. If the building is in an SFHA, the federal agency or lender is required by law to provide written notification to the borrower that flood insurance is mandatory as a condition of the loan. Even though a portion of real property on which a building is located may lie within an SFHA, the purchase and notification requirements do not apply unless the building itself, or some part of the building, is in the SFHA. However, lenders, on their own initiative, may require the purchase of flood insurance even if a building is located outside an SFHA. Up to 25% of all NFIP flood losses arise outside SFHAs (B, C, and X Zones).
Under federal regulations, the required coverage must equal the amount of the loan (excluding appraised value of the land) or the maximum amount of insurance available from the NFIP, whichever is less. The maximum amount of coverage available for a single-family residence is $250,000 and for non-residential (commercial) buildings is $500,000. Federal agencies and regulators, including government-sponsored enterprises such as Freddie Mac and Fannie Mae, may have stricter requirements.
- If the policy lapses during the mortgage term and is not restored, the lender may purchase its Force-placed policy. The cost of force-placed policies is then applied to the mortgage. If there's a flood damage claim, payment is made to the lender, not the property owner.
- Most policies are still subsided to some degree. If the policy lapses and needs to be re-issued, it will likely cost considerably more because the previous subsidy would have been extinguished.
What's Not Covered by the Policy
The mandatory purchase requirement does not affect loans or financial assistance for items not covered by a flood insurance policy, such as vehicles, vessels, houseboats, business expenses, landscaping, pools, outside motors, porch items, and vacant lots. It does not affect loans for buildings not in the SFHA, even though some of the properties may be flood-prone. While not mandated by law, a lender may require a flood insurance policy as a condition of a loan for a property that is only partially within a 100-year floodplain, as indicated on a Flood Insurance Rate Map.
For additional information, speak with your Insurance Agent or the City's Building Department at (305) 809-3791.