November 21, 2019

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FHA Mortgages In Special Flood Hazard Areas

FHA Loans In Special Flood Hazard Areas

The FHA lender’s handbook, HUD 4000.1, has instructions for the lender to make sure properties to be purchased with an FHA mortgage aren’t located in certain zones. The lender is also tasked with insuring that if the home is located within certain flood hazard areas that the appropriate hazard insurance is obtained as a condition of loan approval.

One such zone is the Special Flood Hazard Area or SFHA. HUD 4000.1 instructs the lender to insure that a home is located in an SFHA as declared by FEMA.

“The Mortgagee must obtain flood zone determination services, independent of any assessment made by the Appraiser to cover the Life of the Loan Flood Certification” where applicable.

But in general, there are some areas where an FHA mortgage simply is not possible due to certain zones or status areas related to flooding. What does HUD 4000.1 tell the lender about these zones?

In essence, a home is NOT eligible for an FHA mortgage under certain circumstances:

  • a residential building and related improvements to the Property are located within 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; or
  •  the improvements are, or are proposed to be, located within a Coastal Barrier Resource System (CBRS).

Those are direct quotes from HUD 4000.1, which breaks down further restrictions to purchasing certain homes with an FHA mortgage. For properties classified as New Construction, HUD 4000.1 says an FHA mortgage MAY be possible if the home is located in a SFHA if the lender does the following:

“…obtains from FEMA a final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA;”

OR

“…obtains a FEMA National Flood Insurance Program Elevation Certificate (FEMA Form 81-31) prepared by a licensed engineer or surveyor. The elevation certificate must document that the lowest floor including the basement of the residential building, and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria.”.

FHA loan rules also say that “insurance under the NFIP” is also a requirement and a condition of loan approval.

For FHA loans to buy existing construction properties in a SFHA, similar NFIP insurance is required as a condition of loan approval.

There is also a separate section for FHA Condo Loans, and another for Manufactured Housing Loans. For FHA Condo Loans, HUD 4000.1 requires the lender to “ensure the Homeowners’ Association (HOA) obtains insurance under the NFIP on buildings located within the SFHA.

The flood insurance coverage must protect the interest of the Borrowers who hold title to an individual unit, as well as the common areas of the Condominium Project.”

For manufactured housing, HUD 4000.1 has specific requirements including how high the property must be above the “flood elevation”.

It tells the lender that in cases where, “any portion of the dwelling, related Structures or equipment essential to the Property Value and subject to flood damage” are located within an SFHA, “Property is not eligible for FHA mortgage insurance” unless the lender takes steps to get a determination from FEMA that the property is no longer in a Special Flood Hazard Area.

In such cases, the lender must also get a FEMA National Flood Insurance Program (NFIP) Elevation Certificate showing that the “finished grade beneath the Manufactured Home is at or above the 100-year return frequency flood elevation”. NFIP flood insurance is also required.

Bruce Reichstein - Staff Writer

By Bruce Reichstein

September 11, 2019

Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.

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