Many first-time homebuyers are surprised to learn that standard homeowners insurance doesn’t cover flooding. Flood insurance is a separate type of policy, and it can be an essential part of securing a VA loan for some buyers.
When it’s called for, VA lenders will require a flood insurance policy in order to finalize your home loan. This specialized form of insurance helps protect both lenders and homeowners. Standard policies tend to offer separate coverage for structures and belongings.
Flood damage can be financially devastating. From 2011 to 2015, the average flood insurance claim was $43,000, according to the National Flood Insurance Program.
Once you’re under contract on a home, lenders will typically order a flood certification for the property. That’ll likely be the case regardless of where you’re buying, be it in the desert or on a mountaintop.
It’s not uncommon for lenders to work with third parties for the flood certification. These companies will evaluate the property based on current flood maps from the Federal Emergency Management Agency (FEMA), along with maps, parcel boundaries and other tools. FEMA administers the National Flood Insurance Program, which covers most communities in the country.
Generally, if the residential property is in a flood zone, buyers will need to obtain flood insurance, either through the National Flood Insurance Program or from a private insurer.
But these aren’t always black-and-white scenarios. It’s possible for part of the property to be in a flood zone while the home itself is on higher ground, above the base flood elevation. Flood maps will typically make that determination, but not always.
In some cases, would-be buyers can hire a surveyor or engineer to map and certify the elevation of the property. The buyer can then basically petition FEMA to update their flood map. Lenders would need FEMA to make the change and obtain an updated flood certification, otherwise the borrower would be required to get flood insurance.
In addition, some communities aren’t part of the National Flood Insurance Program. FEMA won’t have flood maps and flood zone designations for these areas. But lenders will still require a flood certification for properties in these non-participating communities.
In these cases, prospective buyers will often need a professional elevation certification to prove the home isn’t in a flood zone. Would-be VA borrowers may run into difficulties in these non-participating communities if it turns out flood insurance is required.
Policies and guidelines on this can vary by lender. At Veterans United, we will not currently lend on a property that requires flood insurance but is not located in a National Flood Insurance Program community.
Borrowers will often need to pay the flood insurance premium upfront, although it’s possible to pay this at closing. In either case, VA buyers can negotiate with the seller to basically reimburse this cost at the closing table. That’s ultimately part of your overall negotiation with the seller regarding your VA loan closing costs.
Similar to homeowners insurance, buyers will have to escrow funds for flood insurance. And, as with homeowners insurance, lenders will consider those expenses when calculating your debt-to-income ratio and your residual income.
Prospective buyers may also be able to assume the current homeowner’s flood insurance policy.
Last, it’s also important to understand that the home you’re buying might not be in a flood zone today, but it could be tomorrow. FEMA does update flood maps when warranted, and that means your property could require flood insurance later in your mortgage term.
The government notifies mortgage servicers when this happens, and it’s the servicer’s job to let affected homeowners know they need to obtain flood insurance.