Why does my mortgage lender require me to buy flood insurance?
Under federal law, the purchase of flood insurance is mandatory for all federal or federally related
financial assistance for the acquisition and/or construction of buildings in high-risk flood areas (Special Flood Hazard Areas or SFHAs).
The amount of flood insurance coverage required by the Flood Disaster Protection Act of 1973,
as amended by the National Flood Insurance Reform Act of 1994, is the lesser of the following:
- The maximum amount of NFIP coverage available for the particular property type,
- The outstanding principal balance of the loan, or
- The insurable value of the structure.
If the property is not in a high-risk area, but instead in a moderate- to low-risk area, federal law does not
require flood insurance; however, a lender can still require it.
In fact, more than 20 percent of all flood insurance claims come from outside mapped high-risk flood areas.
Note that if during the life of the loan the maps are revised and the property is now in the high-risk area,
your lender will notify you that you must purchase flood insurance.
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