Flood Insurance and Your Mortgage: What Lenders Require and Why

Federally regulated lenders are required by law to make sure a building securing a mortgage in a Special Flood Hazard Area carries flood insurance for as long as the loan exists. If that coverage lapses, the lender can step in and force-place a policy on the borrower's behalf, typically without the borrower choosing the carrier or coverage details. Lenders are also required to accept a private flood insurance policy that meets the regulatory definition of private flood insurance, so a borrower is not limited to a single source for meeting the requirement.

Here is what actually triggers the requirement, roughly how much coverage a lender typically requires, what happens if a policy lapses, and where private flood insurance fits into the picture.

What Triggers the Mandatory Purchase Requirement

The mandatory purchase requirement applies when two things are both true: the loan is made, held or serviced by a federally regulated lender, and the building securing that loan sits in a Special Flood Hazard Area, meaning it carries at least a 1% annual chance of flooding according to the effective flood map. When both conditions are met, the lender must require flood insurance as a condition of the loan, for as long as the loan is outstanding, not just at closing.

The requirement follows the building, not the borrower's preference. A borrower who does not think their property is at meaningful risk does not get to opt out if the map places the building in a Special Flood Hazard Area.

How Much Flood Insurance Your Lender Will Require

Lenders typically require flood insurance coverage equal to the lesser of three amounts:

• The outstanding principal balance of the loan.
• The insurable value of the building.
• The maximum amount available, which for the NFIP is $250,000 for a residential building or $500,000 for a commercial building.

Whichever of those three numbers is smallest sets the required amount. A borrower with a small remaining loan balance on an expensive home, for example, may only be required to carry coverage up to that remaining balance, not the full value of the building.

What Happens If Your Flood Insurance Lapses

A lender that discovers a required flood policy has lapsed, whether from non-payment, non-renewal or cancellation, is required to notify the borrower and give them a window to obtain coverage on their own. If the borrower does not get a qualifying policy in place within that window, the lender can force-place flood insurance and charge the cost to the borrower.

A force-placed policy is selected and purchased by the lender, not the borrower, and the borrower typically has little say over the carrier, the coverage details or the cost. Keeping a policy current, and renewing it before it lapses, avoids ending up with a lender-selected policy instead of one chosen directly.

Private Flood Insurance and Your Lender

Lenders are not limited to accepting only NFIP policies to satisfy the mandatory purchase requirement. Federal regulation requires lenders to accept a private flood insurance policy that meets the regulatory definition of private flood insurance, meaning it provides coverage that is at least as broad as what the NFIP would provide for the same risk.

That requirement is why a borrower can shop a private carrier like Sterling and still satisfy a lender's flood insurance condition, rather than being limited to one source of coverage. Sterling writes residential, commercial, CBRA and excess flood coverage in 47 states.

What to Do Before Closing or Renewal

A flood policy generally has a standard 30-day waiting period before coverage takes effect, with limited exceptions such as a policy tied to a loan closing or a map change. That waiting period is why flood insurance needs to be arranged well before a closing date, not the week of it, and why a lapsed renewal should be addressed as soon as the renewal notice arrives rather than waiting for a lender's lapse notice.

Common Mistakes with Mortgage-Required Flood Insurance

• Waiting until closing week to request a flood quote. The standard waiting period can leave a borrower without coverage in place on time.
• Assuming the NFIP is the only option that satisfies a lender. A private flood policy that meets the regulatory definition must be accepted by the lender.
• Letting a policy lapse and assuming nothing will happen. A lapse that goes unresolved within the lender's notice window can result in a force-placed policy.
• Assuming the required coverage amount equals the full value of the home. It's typically the lesser of the loan balance, the insurable value, or the applicable maximum.

Pro Tips from Sterling Flood Underwriters

Start the flood insurance conversation as soon as a flood zone shows up on a closing disclosure. The standard waiting period makes early better than exact when it comes to insurance.

Send your lender's requirements with your quote request. Lenders sometimes specify details, like how the loss payee is listed, that are easy to get right the first time and annoying to fix later.

Get a Quote

If your lender requires flood insurance and you want a private policy option, Sterling writes coverage designed to meet that requirement. Get a flood insurance quote from Sterling Flood.

Frequently Asked Questions

Can I use a private flood policy to satisfy my lender's requirement?

Yes. Lenders must accept a private flood insurance policy that meets the regulatory definition of private flood insurance.

How much flood insurance does my lender require?

Typically the lesser of the outstanding loan balance, the insurable value of the building, or the applicable maximum amount available.

What happens if I let my flood policy lapse?

Your lender is required to notify you and give you a window to get coverage back in place. If you don't, the lender can force-place a policy and charge you for it.

How far before closing should I get flood insurance in place?

Flood policies carry a standard 30-day waiting period, with limited exceptions, so it's worth starting the process well before your closing date rather than the week of it.