New Flood Insurance Requirements: What Does It Mean For Your Mortgage Loan?

Q: I had to buy a flood insurance policy to borrow money for my home. Do I have to keep it in force now and do I have to pay the full annual premium again?

A: If you presently own a home in an area designated as a flood zone, or if you purchase a home any time after Jan. 1, 2016, the subject of flood insurance will be familiar to you.

Flood insurance is not a new requirement on certain mortgage loans, but there have been recent changes that may affect your existing mortgage loan now, and will certainly affect any new mortgages going forward.  This is a good time to understand the obligation to keep continuous flood insurance coverage on your home.

New requirements for credit unions making mortgage loans became effective on Jan. 1, 2016.  But it’s possible you may not receive written notice until June 30, 2016 because that’s the deadline for larger credit unions to notify borrowers of their option to escrow flood insurance premiums and fees.

If your home is located in a flood zone according to FEMA’s Flood Insurance Rate Map, your obligation to carry flood insurance was clear to you at closing. As you already know, flood insurance is not included with your regular homeowners’ insurance policy.

Where To Get Flood Insurance

Homeowners must purchase a separate policy issued by the federal government’s National Flood Insurance Program. The cost of flood insurance varies widely, based upon the level of flood risk where a particular home is located. The average annual premium is $700, although premiums could exceed $350 per month for expensive homes along the coasts.

After the first year, borrowers occasionally forget to renew their flood insurance policy or they simply can’t pay for it in one lump sum as they did at closing. The new federal regulations are designed to fill in any gap created by accidental lapses or intentional cancellations in flood insurance coverage.

Basically, mortgage lenders now have the obligation to “force-place” flood insurance on your property to avoid gaps in coverage, or to increase coverage whenever your policy value no longer meets legal minimums.

Force-placed insurance coverage is also called creditor-placed, lender-placed or collateral protection insurance because the lender contacts an insurance agent and sets up a new flood insurance policy for its own protection.  If you obtain a new mortgage or have an outstanding mortgage after Jan. 1, 2016, these new requirements very likely apply to you and your lender.

However, most credit unions with less than $1 billion in assets, as well as those with no federal or state requirements to deposit taxes, insurance premiums, fees or other charges into an escrow account during the term of any loan that’s secured by residential real estate are exempted from the new requirements.

It’s also worth noting that business, commercial and agricultural real estate mortgage loans are not covered under the new federal flood insurance escrow rule.

According to the National Association of Federal Credit Unions, the following language provides the gist of the new flood insurance escrow requirements:

“760.5(d) – Option to Escrow. This section informs credit unions that are not exempt from this rule to offer, make available and provide notice to borrowers about the option to escrow all premiums and fees for any flood insurance required for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016.”

Why Flood Insurance Is Important

You might be wondering why the obligation to carry flood insurance and to escrow premiums to pay for it is so important. Here are the main reasons:

1. Flood insurance is crucial for homeowners and lenders to recoup their losses after a flood.
2. Flood insurance will be obtained by the lender if the homeowner lets a policy lapse or cancels it.
3. Flood insurance obtained by the lender tends to be more expensive than the homeowner’s own policy, but the homeowner is required to pay for it by placing funds as part of their regular mortgage payment in escrow for the lender’s policy premium payments.
4. Flood insurance premiums can be paid to your credit union, along with your monthly mortgage payment, if you choose not to continue your own flood insurance policy.
5. Flood insurance is likely to be less expensive if you keep your own policy in effect rather than paying for it through your credit union.

Letting your original flood insurance policy lapse or cancel may now cost you more in premium dollars than you would otherwise have paid.

Does your mortgage loan require you to pay for flood insurance? Is your policy up to date? Now is a good time to check up on your flood insurance coverage.