More homeowners in flood zones will soon have expanded options for flood insurance, potentially lowering costs dramatically. Starting Dec. 21, those with mortgages backed by the Federal Housing Administration can get flood policies through private insurers. Previously, FHA home buyers—who are required to have flood insurance if their property is in a FEMA-designated flood area—had to obtain insurance through the National Flood Insurance Program.
The new rule, which was handed down by the Department of Housing and Urban Development, is a “victory for consumers, for choice, and for flood coverage that will protect more borrowers and property from the number one natural disaster in the United States,” 2023 NAR President Kenny Parcell said in a statement. “NAR has long advocated for an updated rule to address an inequality with conventional borrowers.” Homeowners with conventional mortgages have had the option to purchase private flood insurance for a number of years now.
The average cost of flood insurance through the NFIP is $738 per year, but rates vary greatly depending on a number of factors including the home’s location and how much coverage is needed, according to an analysis by online insurance marketplace Policygenius. Consumer choice was greatly limited under the FHA’s previous rule—a dated policy written decades ago when there was a scant private flood insurance market, Parcell noted.
Standard home insurance policies do not protect against flooding, so homeowners must purchase a separate policy.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” says 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.”
High costs, indeed, have been an issue for homeowners, many of whom have failed to comply with flood insurance requirements. A HUD report published earlier this year showed that thousands of FHA-backed mortgages lacked required flood insurance. The FHA provides taxpayer-backed insurance to 8.2 million mortgages, about 200,000 of which are located in high flood risk areas. The report found that of those 200,000 mortgages, about 31,500 did not have the required NFIP coverage. That ultimately exposes taxpayers to about $4.5 billion in increased liability. Homeowners without flood insurance who face flood damage are at increased risk of defaulting on their mortgages, especially if the cost of uninsured repairs trumps their mortgage payment.
“The increasing threat of flood damage in many areas poses a significant risk to both homeowners and the FHA program,” says Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “Accepting private flood insurance shifts some of the risk to the private market, ultimately helping to protect FHA’s Mutual Mortgage Insurance Fund.”The insurance market today is increasingly providing higher-quality, lower-cost alternatives, Parcell said. “While the FHA rule does not perfectly align with the other federal rules, NAR stands ready to work with HUD to address any remaining differences that could create lender confusion,” he added. Ensuring borrowers are protected against flood risk is a key component within HUD’s Climate Action Plan, which was released in 2021.