We’ve received an interesting call from Platinum Affiliate and Lender with Academy Mortgage Jamie Pollard on a recent rejection of private flood insurance for a property obtaining an FHA loan – demanding only National Flood Insurance Program coverage (NFIP). When Jamie explained that they have had exceptions in the past allowing for Lloyds of London coverage, he received a reply that, “You are correct, we have done exceptions for this in the past. However, the FHA 4000.1 Handbook states flood insurance must be obtained through NFIP and we cannot issue an exception that goes against agency guidelines. (see guidelines below).
All REALTORS should be on notice that VA, FHA and USDA loans are requiring NFIP coverage and not accepting private insurance. We urge you to be very careful when speaking about flood insurance, regardless of loan type of the buyer. Get the lender and the insurance agent involved in the transaction IMMEDIATELY when signing a P&S to address any issues at the onset.
(1) make sure you are advising buyer clients on the differences between NFIP and private insurance or directing them to investigate this with their insurance agent ASAP (note, not all insurance agents are aware of the requirements of different loan types, so the lender needs to be a part of this conversation);
(2) make sure all buyer understand there may be risks with the ability of private insurance in the future;
(3) make sure that buyers understand that when reselling the property, future buyers may not be able to access private insurance at lower rates.
Please also advise seller clients that addressing any flood zone issue early is a benefit to them in closing their property quicker. They should share with you any information known, as well as policies currently held.
(1) Ask if the current flood zone is being grandfathered, so that the buyer may take advantage?
(2) Ask if there has been continuous NFIP coverage on the property? If the SFHA zone has changed due to a redrawing of maps, NFIP will not change the flood zone if there has been continuous coverage.
(3) FEMA says, ” If the seller of the property currently has an NFIP flood insurance coverage on the building, that policy can be assigned to the buyer at the time of property closing.” Beware of waiting periods and process for attempting to transfer a policy.
(4) Have an elevation certificate in advance, when possible, and make any appeals to remove a property mis-classified.
From the 4000.1 Handbook Guidelines
II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A.
Title II Insured Housing Programs Forward Mortgages Origination/Processing
Property Eligibility and Acceptability Criteria General Property Eligibility
The Property must be located within the U.S., Puerto Rico, Guam, the Virgin Islands, the Commonwealth of the Northern Mariana Islands, or American Samoa.
(1) Special Flood Hazard Areas
The Mortgagee must determine if a Property is located in a Special Flood Hazard Area (SFHA) as designated by the Federal Emergency Management Agency (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.
A Property is not eligible for FHA insurance if:
- 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).
(a) Eligibility for Proposed or New Construction in SFHAs If any portion of the dwelling, related Structures or equipment essential to the value of the Property and subject to flood damage is located within an SFHA, the Property is not eligible for FHA mortgage insurance unless the Mortgagee:
- 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, and insurance under the NFIP is obtained.
(b) Eligibility for Existing Construction in SFHAs When any portion of the residential improvements is determined to be located within an SFHA, insurance under the NFIP must be obtained.
(c) Eligibility for Condominiums in SFHAs The Mortgagee must 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.
(d) Eligibility for Manufactured Housing in SFHAs The finished grade level beneath the Manufactured Home must be at or above the 100-year return frequency flood elevation. If any portion of the dwelling, related Structures or equipment essential to the Property Value and subject to flood damage for both new and existing Manufactured Homes are located within an SFHA, the Property is not eligible for FHA mortgage insurance unless the Mortgagee obtains:
- a FEMA issued LOMA or LOMR that removes the Property from the SFHA; or
- a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA Form 81-31) prepared by a licensed engineer or surveyor stating that the finished grade beneath the Manufactured Home is at or above the 100-year return frequency flood elevation, and insurance under the NFIP is obtained