A home buyer can run into a series of obstacles before they officially purchase their new home. As a loan officer, you need to have the correct information your lenders need to know before they get too scared to purchase or feel like they can't afford the property their finances are about to embark upon. Don't lose a lender by not being able to give them the correct information or letting uncertainty get the best of them.
#1 Flood Zones
Flood zones are defined according to varying levels of flood risk depending on their geographical area. Without understanding flood zones and how it affects a buyer's flood insurance policy, the ability for a special flood hazard area to scare a buyer off is probable. It's important to understand when an insurance policy is necessary or when it isn't.
Flood Zone A: This is an area with a 1% annual chance of flooding and a 26% chance of flooding over the life of a 30-year mortgage. Mandatory flood insurance is usually required for this area.
Flood Zone AE: The difference between this flood zone and the one above is simply the Base Flood Elevations are shown. This area is still subject to a 1% annual chance of flooding and a 26% chance of flooding over the life of a 30-year mortgage. Mandatory flood insurance is usually required for this area.
Flood Zone AH: This is another area with a 1% annual chance of flooding with areas that typically have ponding that are as deep as one to three feet. Mandatory flood insurance is usually required for this area.
Flood Zone AO: This is an area with a 1% annual chance of shallow flooding with sheet flow on sloping terrain is typically found. The flooding in this area is usually one to three feet. Mandatory flood insurance is usually required for this area.
Flood Zone V: When a property is along the coast, they are usually subject to a 1% annual chance of flooding with the possibility of other additional hazards such as storm induced waves and surges. Mandatory flood insurance is usually required for this area. These properties have flood insurance rates that are usually the most expensive because of their proximity to water.
Flood Zone VE: This area is not only subject to flooding, but has the possibility of other additional hazards like storm induced velocity wave action. Mandatory flood insurance is usually required for this area. These properties have flood insurance rates that are usually the most expensive because of their proximity to water.
Flood Zone D: This is an area with possible but undetermined flood risk as flood hazard analysis hasn't been conducted in this area.
Flood Zone X: This is a minimal risk area where flood insurance is usually not required, but usually has the best flood insurance rates because it's such a low risk.
These zones have been defined by FEMA. While not all flood zones are listed here, they are the most common zones you'll likely see come across your desk.
#2 Flood Insurance Options
There are two options for flood insurance coverage.
- The National Flood Insurance Program (NFIP) is provided by FEMA.
The NFIP is the primary carrier for the majority of homeowners and a major player in the flood insurance industry. NFIP is required to take all applicants that live in NFIP-participating communities and those who have had past flood insurance claims. Because it is backed by the federal government, policies are guaranteed by the government if ever something was to happen. But it comes with some limitations. Your policy is limited to smaller coverages. The NFIP covers up to $250,000 in building coverage for dwellings and up to $100,000 in contents coverage and takes 30 days for the policy to kick into action (unless your house is closing).
- Private Insurance
Private flood insurance companies are creeping up slowly after the rise in flood claims. Though the NFIP is a major player in the flood industry, private companies have more options that are not even available to NFIP policyholders. If you have a large or expensive property or find FEMA's options insufficient, private insurance is your best option. With robust coverage options such as excess coverage, contents insurance, quicker activation (sometimes, less than a week), and better claims customer service. If your home is over $250,000 or you want more coverage for your belongings or broader coverage for outside structures on your property, you will be more at peace with a private flood insurance company that offers up to $2 million with personal property protection up to $1 million. (Note that coverages for personal property inside an outside structure do not exist.)
#3 Policy Transfers
A policy transfer is when a flood insurance policy is reassigned to a new property owner by the last property owner. This can also be called a policy assumption. This can be a beneficial move for some home buyers when it comes to the flood zone of the home.
Sometimes, the flood zone of a property can change from a moderate zone to a higher risk flood zone, when this happens, it can cause the flood insurance rates to jump. When there is a policy transfer, the rate that was assumed with the lower flood zone is then continued with the transferred policy, locking the rate.
If you're an individual buying a property, sometimes transferring the flood insurance policy can be beneficial if the previous property owner already paid out the premium for the policy in advance. Since those premiums are already paid up, the new property owner has until the renewal of the policy before anything needs to be paid. This will save on the closing costs the home buyer will need to pay in the end.
