What is a Flood Insurance Requirement?

A flood insurance requirement is a mandate that an owner of improved land have flood insurance, especially if the improvements are being financed by a federally-regulated lender. This requirement generally only applies to properties that are particularly susceptible to flooding. In the United States, this is a requirement when a property is located in a Special Flood Hazard Area. The flood insurance requirement is meant to protect to the lender, as well as the federal government, who may ultimately secure the loan or be adversely affected by a default.

The history of the flood insurance requirement for federally-backed mortgage programs in the United States began in the 1970s, with the Flood-Disaster Protection Act of 1973. That act was followed up by the National Flood Insurance Reform Act of 1994. The provisions not only require flood insurance for federally-backed loans, but also any other federally-funded programs used in the purchase, construction, repair, or improvement of a home or building in a 100-year flood plain.

Any home within a Special Flood Hazard Area is known as being in a 100-year flood plain. This does not mean that a flood happens once every hundred years, but is simply a way to say there is a 1-percent chance that a flood could happen on the property each year. Generally speaking, a property in a Special Flood Hazard Area has a flood insurance requirement because flooding the most likely of all disasters.

Those who are hoping to save money on a home by opting out of flood insurance may find they have no choice if they are looking at a Special Flood Hazard Area. The only way to avoid paying for flood insurance is to purchase on an owner-financed contract or pay cash outright for the home. If the area is prone to flooding, even in an owner-financing situation, the owner of the home may require flood insurance. Dropping flood insurance after securing the loan could subject the buyer to penalties up to and including forfeiture of the home.

In order to determine whether there is a flood insurance requirement for a particular parcel, potential buyers can look at a flood insurance rate map provided by the Federal Emergency Management Agency. A city or county housing office may also be able to provide this as a resource. If not, a lender will inform the buyer of the requirement before closing on the loan.