A reader got in touch recently with a question about hazard insurance and FHA mortgages. “We’re fixing to close on a home and they’re telling us that we have to have a shed that is on the lot covered with flood insurance. Is this correct and how much coverage do you have to have on a shed if you’re in a flood zone?”
We get a large number of “Is this correct?” type questions. Some ask because they don’t realize that FHA loan rules aren’t the only ones that must be followed in a mortgage loan transaction.
If the requirement is made by the lender, that lender’s standards would apply as long as the standards are in accordance with FHA loan guidelines, state law, and federal law. So the “Is this correct?” question is “Yes” when the lender’s standards require it.
Flood insurance requirements will vary from state to state. Borrowers who want to purchase property in known flood zones will be required to carry flood insurance. Some special flood zones may render a property ineligible for an FHA mortgage unless certain conditions are met. From HUD 4000.1:
“If any portion of the property improvements (the dwelling and related Structures/equipment essential to the value of the Property and subject to flood damage) is located within a Special Flood Hazard Area (SFHA), the Mortgagee must reject the Property” unless certain qualifying conditions are met. (See a loan officer to determine what may be possible in your circumstances.)
The second part of this reader question involves coverage amounts. However, there’s no single answer for this-lenders have different requirements depending on the locale, state law, or other factors. Borrowers should know that when it comes to coverage amounts and other details for hazard insurance, that a conversation with the loan officer is the best way to get that specific information.
The nature and potential severity of natural disaster hazards in a given area may vary. Some areas routinely flood after heavy winters, while other areas may be known as “100-year flood plains” or other such expected, but seldom-occurring issues.
The lender will require certain insurance coverage in such cases to protect the investment, but the details of that coverage will be worked out between the lender and borrower based on lender requirements, state law, etc.