Starting Dec. 21, 2022, home owners and buyers with FHA mortgages can purchase flood policies through private insurers
Private insurance options become available for FHA mortgages.
Standard home insurance policies do not protect against flooding, so homeowners must purchase a separate policy, but the high cost has been prohibitive for many. By year’s end, however, more homeowners in flood zones will have expanded options for flood insurance, potentially lowering costs significantly.
Home buyers utilizing FHA mortgages are required to add flood insurance if their property is located in a FEMA-designated flood area. They were previously forced to obtain insurance through the National Flood Insurance Program, while homeowners with conventional mortgages had the option to purchase less expensive private flood insurance. High costs have been a barrier to flood insurance for homeowners. As a result, many have failed to comply with the requirements. At the same time, climate change is causing more extreme weather events and inland flooding.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” Federal Housing Commissioner Julia Gordon told NAR. “The choice to select a private flood insurance option may enable some borrowers to obtain policies that are less expensive or provide enhanced coverage.”
The change applies to all FHA-insured Single Family Title II mortgages, including Home Equity Conversion Mortgages (HECM) and loans insured under FHA’s Title I programs. Specifically, the final rule updates FHA regulations to allow borrowers the option to purchase a comparable private insurance policy meeting FHA requirements for FHA-insured mortgages secured by properties located in Federal Emergency Management Agency (FEMA)-designated Special Flood Hazard Areas (SFHAs).
As part of its implementation, as of Dec. 21, FHA will require lenders to provide detailed flood insurance coverage information when electronically submitting mortgages for FHA insurance on properties in SFHAs. This data collection is an objective included in HUD’s Climate Action Plan.
The new rule is a win for FHA borrowers, but there is some concern that the lack of complete alignment with federal flood insurance requirements may lead to the rejection of some flood policies on FHA loans that are acceptable for other federally-backed loans. The Mortgage Bankers Association will be working with HUD on improvements to housing policies and regulations that comply with the FHA program.
Ensuring that borrowers are protected against flood risk is a key component of HUD’s Climate Action Plan, released in 2021 in response to President Biden’s Executive Order on ‘Tackling the Climate Crisis at Home and Abroad.’ HUD has been implementing this broad approach to the climate crisis that seeks to reduce climate pollution; increase resilience to the impacts of climate change; protect public health; deliver environmental justice; and spur well-paying union jobs and economic growth.