Lenders require more insurance coverage in high-risk flood zones

How much flood insurance a homeowner needs depends on its replacement cost and if the home is in a high-risk area for flooding the coverage will cost more.

Lenders normally require a homeowner to buy flood insurance if the property is in a flood zone identified by the Federal Emergency Management Agency (FEMA), Bankrate.com reported.

“A mortgage lender has a financial interest to protect the property’s value in the event of a catastrophic flood loss, especially if that home is located in an area at higher risk for flooding,” Kyle Herring, an insurance claims professional and public adjuster at All American Public Adjusters in Austin, Texas, told Bankrate.com.

A home’s value drops drastically if it suffers flood damage that the homeowner can’t repair due to a lack of funds. That affects the homeowner and the lender, he said.

A homeowner with a government-insured mortgage through FHA, USDA or a VA loan must purchase flood insurance if the home sits in a high-risk flood zone, Madelyn Rodriguez, an associate attorney and insurance expert at Berger Singerman LLP in Boca Raton, Florida, told Bankrate.com

She said private lenders that don’t have to follow those rules still may require flood insurance.

A search of FEMA’s Flood Map Service Center will reveal if a property is within a flood zone.

FEMA set up two categories of flood zones. The high-risk areas often subject to flood insurance requirements are called Special Flood Hazard Areas. Those zones begin with the letters A or V. Moderate- to low-risk zones start with B, C or X. Homeowners usually won’t be required to buy flood insurance for property in these zones.

Replacement cost value allows the homeowner to replace or repair a damaged property. Actual cash value deducts for wear and tear based on its age and condition.

To best determine how much flood insurance you’ll need for your mortgage, work closely with an insurance professional, advises

“An insurance professional can help you calculate the replacement cost or actual cost value of your home and personal property and generate a flood policy quote,” Brian Bradley, personal insurance advisor for CBIZ Inc., an insurance provider, in Cumberland, Maryland, told Bankrate.com.

The maximum coverage for a residential property through the National Flood Insurance Program (NFIP), is $250,000. The property owner can insure up to $100,000 for personal property, Herring said. But for a home that’s worth more, private companies can provide supplemental flood insurance coverage. The premiums will be more expensive and deductibles will be higher.