New Rule Enables Private Flood Insurance for FHA Loans on Properties in Flood-risk Areas
Written By: Joel Palmer, Op-Ed Writer
The U.S. Department of Housing and Urban Development (HUD) will soon allow home buyers obtaining an FHA-insured mortgage to use private flood insurance.
The provision is effective December 21, 2022. A Mortgagee Letter published last week provides implementation guidelines for FHA-approved lenders.
The Federal Housing Administration requires that insured mortgages for properties in Federal Emergency Management Agency (FEMA)-designated Special Flood Hazard Areas (SFHAs) have flood insurance. Previously, only flood insurance obtained through the National Flood Insurance Program (NFIP) was permissible for FHA-insured mortgages.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” said Federal Housing Commissioner Julia Gordon. “The choice to select a private flood insurance option may enable some borrowers to obtain policies that are less expensive or provide enhanced coverage.”
To be eligible, a private insurance policy must provide coverage that is at least as broad as the coverage provided by NFIP. In addition, the private policy’s deductible cannot be higher than the program’s specified maximum and it must include similar non-applicability provisions.
As with FEMA flood coverage, communities must participate in the NFIP for a home in that community to be eligible for private flood insurance on an FHA mortgage. HUD has added language to the rule to ensure that prospective homeowners seeking homes in communities that do not participate in NFIP are aware that they will not be able to obtain a private flood insurance policy and still meet FHA insurance requirements.
As part of its implementation, FHA will require lenders to provide detailed flood insurance coverage information when electronically submitting mortgages for FHA insurance on properties in flood zones. This data collection is part of HUD’s Climate Action Plan and to capture and analyze flood insurance information on mortgages in its portfolio.
This recent rule change began with the Biggert-Waters Flood Insurance Reform Act of 2012. Part of the law amended the Federal flood insurance statutes to encourage private-sector participation. However, it did not require private policies to be accepted on FHA-insured loans.
HUD first proposed a rule two years ago to allow private insurance on FHA-insured mortgages in designated flood zones. At the time, HUD said that a “mortgagee’s acceptance of private flood insurance policies would provide borrowers with more flood insurance choices, promote consistency with industry standards, reduce the regulatory restrictions on flood insurance for FHA-insured loans, and harmonize FHA policies with the congressional intent expressed in the Biggert-Waters Act to encourage an expanded private flood insurance market.”
HUD said the proposal was generally accepted during the comment period, with many commenters stating that federal flood insurance policies are significantly more expensive than private insurance. One commenter said the Federal option he was quoted was more than five times more expensive than a private insurance option, and that the federal deductible was twice as high as the private policy. Moreover, commenters stated that private insurance offered more coverage for lower premiums.
Commenters generally agreed that private flood insurance would help low to middle income families save money, expand homeownership to first time homeowners, and help homeowners stay in their homes rather than having to sell because of expensive NFIP flood insurance.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
