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Is Flood Insurance Included in a Mortgage?

Flood-damageWhen buying a house in a flood zone, you're probably thinking, "Do I need flood insurance?" The answer is yes if you buy in a flood zone with a mortgage. That's because mortgage lenders don't want to risk losing the asset backing your home loan. And when lenders protect themselves, they also protect you.

Is flood insurance worth the cost? Very likely -- here's why:

Cost of flood damage

According to Floodsmart.gov, even a few inches of water on your floor can do extensive damage. Here is the estimated damage to a 2,500 square foot house for flooding between one inch and four feet:

Flood DepthDamage
1 Inch$26,807
6 Inches$52,037
1 Foot$72,162
2 Feet$87,326
3 Feet$94,538
4 Feet$103,355

Home insurance policies do not cover flood damage. Unless you can absorb a $25,000 to $100,000 hit to your savings, flood insurance should probably be part of your home budget. This is especially true if you have a great deal invested in your home's finishes and furnishings. They might be the first items damaged if things get wet.

"Everyone lives in a flood zone"

You may think the question you need answered is, "Do I need flood insurance for my mortgage?" but the real question you should be asking is, "Do I need flood insurance?"

An Insurance Information Institute study finds that more than one-fifth of claims for flood damage come from people living in low-to-moderate risk areas. These homeowners are not required by lenders to buy flood insurance. And while only 13 percent of homeowners purchase flood insurance, one-third of all disaster relief assistance goes to uninsured people outside of designated flood plains.

Without insurance, if you sustain damage, you may receive low-interest loans from the federal government to recover. And you'll have to pay them back. Buying flood insurance is the only way to fully protect yourself from flood-related expenses.

The National Flood Insurance Program's web site says that for all practical purposes, "Everyone lives in a flood zone."

How flooding affects your mortgage

If you're wondering, "Is flood insurance included in mortgage payments?" it is if you live in a designated flood zone. When mortgage lenders underwrite your loan application, they order a flood certification, or "flood cert." This tells them what flood zone you live in, and the risks associated with it.

High-risk flood zones include areas with a 1 percent chance of flooding (or greater) in any year, or a 26 percent (or greater) chance of flooding during the term of a 30-year mortgage. Zones B, C and X are low-risk, and mortgage lenders don't require flood insurance in those areas.

You pay flood insurance upfront for a full year. That increases your closing costs.

If your lender requires impounds or escrows, it divides that annual premium by 12 and adds that amount to your monthly mortgage payment. When the premium comes due the following year, your loan servicer pays it on your behalf. Otherwise, you have to set aside this money and pay your premiums on time.

Non-payment of required flood premiums forces your lender to pay them on your behalf and then require repayment from you. Your lender can even consider you in default and foreclose on your mortgage if it chooses to.

How to avoid flood insurance in a flood zone

Can you get a mortgage on a house in a flood zone if you don't buy flood insurance? If your property is in a flood zone, you may be able to avoid flood insurance, or get a healthy discount on the premiums, by elevating the home. Elevating or otherwise mitigating flood risk can also put you in a good position when selling a house in a flood zone.

Alternatively, your home may be exempt from flood insurance if it is naturally elevated, perhaps on a small hill, even if it lies within a flood zone.

To get an exemption, submit property and elevation materials with a Letter of Map Amendment (LOMA). For detailed information, call FEMA toll-free at 1.877.336.2627. Flood insurance exemption should be indicated on your home appraisal when you apply for a mortgage.

How much does flood insurance cost?

The cost of flood insurance depends on your flood zone, which predicts your likelihood of experiencing flood damage, your home's elevation, and the amount of coverage you need.

Those in low-risk areas can buy deeply-discounted plans, which run between $150 and $450 per year. Homeowners in higher-risk parts of the country pay more. How much more depends on the elevation of the home, and if it's in a coastal area.

According to FEMA, the average flood insurance premium is about $700 per year. But this can vary a great deal, depending on your home's construction and elevation. Premiums can range from just a few hundred dollars to nearly $10,000 a year.

How does flood insurance work?

National flood insurance is a government program. Flood insurance rates do not vary among providers, who must be licensed to sell these policies.

You can insure your residence for up to $250,000, and its contents for up to $100,000. Want more coverage? Private insurers can sell you additional coverage if your exposure is higher. As with mortgage rates, insurance rates can vary, so shop carefully.

Flood insurance carries a deductible. You may be able to choose a higher deductible and save up to 40 percent on your premium. However, if your mortgage lender requires flood insurance, it may set a maximum allowable deductible for its own protection.

If your lender doesn't require flood insurance, and you want to buy it, know that coverage does not kick in for 30 days. So you can't just decide to buy flood insurance when a storm is heading your way and expect to be protected.

Should you buy flood insurance, if your mortgage lender doesn't require it? Most people don't. But maybe they don't mind gambling with the biggest asset they own.

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