In March 2011, FHA rules changed for properties located in special flood zones or near coastal areas. In the past, the FHA had “strongly encouraged” mortgagees to get a flood zone determination independent of any appraisal; now FHA rules make flood zone determination a requirement for properties.
FHA Mortgagee Letter 2010-43 says “FHA now requires that all Mortgagees obtain a flood zone determination on all properties instead of strongly encouraging such action.” FHA adds, “lenders are now “required to obtain life-of-loan a flood zone determination services, certification independent of any assessment made by the appraiser…”
Flood zone determination can affect a property’s eligibility for an FHA loan, depending on the circumstances. For example, you may be able to apply for an FHA insured mortgage on a home in a special flood zone, but borrowers won’t have loans approved in all cases.
According to the FHA, “A property is not eligible for FHA insurance if a residential building and related improvements to the property are located within a SFHA (Zone A, a “Special Flood Zone Area”, or Zone V, a “Coastal Area”), and insurance under the National Flood Insurance Program (NFIP) is not available in the community.”
The borrower must be prepared to pay for flood insurance for the lifetime of the loan–and some borrowers who want properties near a flood zone but not currently designated as such should be prepared to pay for flood insurance at some point too–according to the FHA, “Insurance must be obtained if the Mortgagee or Servicer becomes aware that the building involved subsequently becomes part of an SFHA due to a Flood Insurance Rate Map (FIRM) revision.”
The FHA also gives the lender power to “force place flood insurance if the borrower allows the policy to lapse or if the coverage is found to be inadequate.”
That’s an important detail of these new rules to keep in mind–borrowers can’t simply pay for a minimal flood insurance policy and hope for the best. If the insurance policy doesn’t actually protect the investment the lender can require additional coverage as a condition of the loan. Borrowers should research this issue carefully before committing to the sale of the home. It’s critical to know what such insurance may cost, how it affects the budget, and what must be done to make a claim in the event of a flood.