In the United States, the notion that our government can require us to purchase something is always going to be unpopular. While the benefits of the National Flood Insurance Program might be easy to see, in terms of protecting our communities from the consequences of serious flooding, a sense of distrust about the government intruding in our lives is embedded in our culture.
With its implications for floodplains and areas subject to coastal storm surge, the Homeowner Flood Insurance Affordability Act of 2014 has a special meaning for those of us who call southeastern North Carolina home. It is understandable that the act, which requires federally regulated or insured lenders to have flood insurance on properties in high risk areas, has been covered extensively in the local media.
The proposed changes would allow certain detached structures to be exempt from the purchase of mandatory flood insurance. This means that homeowners will not be required to carry flood insurance on a work building, shed, garage or any other structure that is detached from the primary residence and does not serve as a residence.
This is a huge victory for the potential home buyer or homeowner, since the need to pay for a separate flood insurance policy for certain types of detached structures has caused deals to fall through in the past. When the proposed changes go into effect, it will allow for the salvaging of transactions that might have otherwise gone sour other. On a personal level, this is exciting for me since my goal is to ensure a successful closing for each transaction.
Near and dear to anyone seeking to finance a home near water, the proposal will require lenders to place flood insurance premiums and fees into an escrow account for loans that close after January 1, 2016, unless the bank or loan qualifies for a statutory exception. Additionally the proposed rule will require institutions to provide borrowers with an option to begin placing flood insurance premiums and fees into an escrow account when it goes into effect.
There are a number of exemptions to the proposed rule. Flood insurance will not be required for the following: loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided; loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provided certain conditions are met; loans that are extensions of credit, primarily for a business, commercial, or agricultural purpose; home equity lines of credit; nonperforming loans; and loans with terms no longer than 12 months.
A major point of interest for me in researching this article is that purchasing flood insurance could be a good idea, even if the property is not located in a high risk area. It is well-known that borrowers in most situations will have to purchase flood insurance for properties in high-risk areas. What I found surprising is the risk profile associated with properties located in what the government has designated as moderate-to-low risk areas.
Nearly a quarter of all flood insurance claims and a third of all Federal Disaster Assistance claims for flooding are filed by people outside of high-risk areas, according to data compiled by FloodSmart.gov, the official website of the National Flood Insurance Program. This is not an insignificant number. Instead, it is a solid indicator that you need to protect your home.
For people who live in high-risk areas, the website shows that there is at least a 1 in 4 chance of experiencing adverse conditions relating to a flood during a 30-year mortgage. To find out more about your home’s flood risk profile, visit www.floodsmart.gov. There is a handy widget on the site where you can input a property address and quickly figure out its associated risks with flooding, as well as the approximate costs for obtaining insurance.
If you have questions about this article or how the proposed amendments to the Homeowner Flood Insurance Affordability Act could impact your home search or ability to refinance, please don’t hesitate to contact me. I also welcome any feedback and comments, and I am happy to provide guidance on the subject.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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