5 Questions First-Time Home Buyers Ask About Flood Insurance
According to the National Association of Realtors, 31% of homebuyers in 2021 were first-time buyers. This can be one of life’s most complex purchases, and there are a lot of articles written on first-time homebuyer mistakes to avoid. A common recommendation: watch out for the hidden costs of home ownership. If your client lives in a flood zone that mandates flood insurance, this cost may not be on their radar. As their insurance agent, you can guide them through this process and help them to answer these five common questions.
#1 – What flood zone am I in?
Help your client to understand whether their dream house sits in a flood zone by using the FEMA Flood Map Service Center, a publicly available tool to find a property’s flood map. There are many possible flood zone designations which generally break out into the following categories:
High Risk Zones: A or V
These areas have a 1% annual chance of flooding and a 26% of flooding over the life of a 30-year mortgage. Flood insurance is mandatory in these zones if there is a federally backed loan on the property.
Moderate- to Low-risk Zones: B, C, or X
Flood insurance is not required by lenders in these areas. However, according to FEMA, 30% of NFIP insurance claims come from outside high-risk flood zones. It may be worth a conversation with your client about adding flood insurance coverage.
#2 – Can a mortgage company force me to buy flood insurance?
If your client lives in an A or V zone and is seeking a federally-backed loan, they are required by federal law to have flood insurance. If the property is outside of a high-risk flood zone, the lender may still require flood insurance. The home is typically collateral for the loan, so the lender doesn’t want to be caught in the situation where that collateral sustains flood damage and goes unrepaired.
The lender may require only up to the maximum coverage available through the NFIP, which is $250,000 for the building. This may be all that is required, but if the home is worth more than $250,000, you should consider talking to your client about coverage adequacy and an option such as EZ Flood that offers a higher coverage limit.
With certain exceptions, flood insurance must be escrowed for homes in mandatory flood zones.
#3 – Will my lender accept private flood insurance?
The Biggert-Waters Flood Insurance Reform Act of 2012 mandated that federally-regulated lenders must accept private flood insurance that meets certain criteria. However, FHA loans on properties in Special Flood Hazard Areas must continue to utilize the NFIP. In 2020, the FHA proposed a change to this rule to allow private flood insurance options, but the requirement has yet to be revised.
#4 – What does flood insurance help cover?
This depends on your particular policy. The NFIP offers coverage for the following:
- Electrical and plumbing systems
- Furnaces and water heaters
- Refrigerators, cooking stoves, and built-in appliances like dishwashers
- Permanently installed carpeting
- Permanently installed cabinets, paneling, and bookcases
- Foundation walls, anchorage systems, and staircases
- Fuel tanks, well water tanks and pumps, and solar energy equipment
- Personal belongings such as clothing, furniture, and electronic equipment
- Portable and window air conditioners
- Carpets not included in building coverage (e.g., carpet installed over wood floors)
- Valuable items such as original artwork and furs (up to $2,500)
Policies available from EZ Flood offer the same coverage as the policy offered by the NFIP with the addition of coverage for catastrophic ground collapse, and options for additional living expenses and swimming pool clean-up
#5 – Do I only have to think about flood insurance this one time?
Remember that a flood zone designation is not permanent.
FEMA can conduct a new study of the property and surrounding area and determine that the flood risk has changed. What was once a low or moderate-risk area may become a high-risk zone that now requires flood insurance.
As home values fluctuate and construction costs continue to rise, the amount of flood insurance coverage is worth reviewing year-to-year with your client. Supply chain disruption and labor shortages have driven up the price tag of home repairs. A current policy’s coverage may not be enough to return a flood-damaged home to its former condition.
For homeowners with flood coverage through the NFIP, Risk Rating 2.0 may change their premiums significantly over the course of a few years
. The intent of the program is to more equitably calculate NFIP premiums based on a broader set of risk data. While some homeowners will see their flood insurance premium go down, others are steeling themselves for a significant price increase. EZ Flood rates are unaffected by Risk Rating 2.0, so this may be an option for your clients to consider in the future, even if they select the NFIP for their initial flood insurance coverage.
This article is provided for general informational purposes only and is not intended to provide individualized advice. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.