Background on Lender's Flood Insurance Requirement

Another Unforeseen Challenge Between Potential Borrower and the Lender

The mortgage rates have never been as good as they are today. So, naturally homeowners will gravitate to refinancing, and those with a steady income will think about buying their first home. I have decided to write about this topic because we were confronted with this issue during the middle of refinancing. I spent numerous hours researching on the Federal Emergency Management Agency (FEMA) site and talking to specialist, city officials, surveyors, and flood insurance agents. There was no one article that satisfied the knotted feeling inside me that wanted to know more and wanted an answer to whether I was truly obligated to carry flood insurance in sunny Los Angeles.


How Do I Know When A Lender Will Require Flood Insurance?

One of the many fees that the mortgage lender will charge is the Flood Certification. This is one of many pieces of information that a lender wants to secure before approving your mortgage application. The lender will receive a report from one of two national flood data companies that generate a report called "Standard Flood Hazard Determination." FEMA does not require flood insurance for any loan; rather, it's the lender that will require flood insurance before your mortgage application can be approved. Without evidence of flood insurance, a loan processor will not forwarded your loan application to its underwriters (the people who crunch the numbers and determine that you are worthy of a mortgage loan).

Background on the Flood Insurance Requirement

Congress passed the National Flood Insurance Act in 1968, thus creating the National Flood Insurance Program (NFIP) to reduce future flood damage through floodplain management and to provide people with flood insurance through individual agents and insurance companies. Then came the Flood Disaster Protection Act in 1973, which is now cited in all flood certification. Those houses that were built prior to 1973 qualify for a reduced rate even without any surveyor's completion of an elevation report. Since our house was built in 1938, we qualified for the reduced rate of $1227.00 under the National Flood Insurance Program.

In 2008, FEMA revisited the maps, and some properties that were in the Special Flood Hazard Area (SFHA) but were not required to carry flood insurance are now being asked to carry flood insurance. I suspect that this was all due to Hurricane Katrina in 2005. Our property happened to fall in this category. So, it was a total shock that our potential lender gave me a copy of the Flood Certification concluding that we now needed flood insurance in sunny Los Angeles.

What does it mean when the lender says that you are required to secure flood insurance?

The Flood Certification has concluded that my property is located in the designated 100-year floodplain [also known as a 1-percent-annual-chance floodplain, or Special Flood Hazard Area (SFHA)]. FEMA and some other organizations keep Flood Insurance Rate Map or Digital Flood Insurance Rate Map.

I spent a lot of time at this point trying to decide what my options were. I could go ahead and pay the grandfathered rate or appeal the determination. The process to ask FEMA to make an official determination regarding the location of your property relative to the SFHA for homeowners is called Letter of Map Amendment (LOMA) or a Letter of Map Revision Based on Fill (LOMR-F). I decided to do the latter because we researched the publicly available appeals and found a house 6 doors south from my property that received a favorable result.

Can I Fill Out This Form Myself?

For a homeowner, the form to appeal the Flood Certification is called the Application Form for Single Residential Lot or Structure Amendments to National Flood Insurance Program Maps, MT-EZ. The form and instruction can be found here. You can fill out part of the form, but you also need a certified surveyor to complete Part B, which includes identifying your property's location on the Flood Insurance Rate Map. Also, you have to comply with documentary evidence of ownership of your property.

In Los Angeles, we learned that surveyors' rates start at $500. A lot of them can fill out an elevation certificate which may enable a property owner to qualify for the best flood insurance rate, but few have heard about the MT-EZ form.

We decided to take a gamble and use the same preparer that resulted in a favorable LOMA for our neighbor. We paid $500 directly to a surveyor and $700 for a flood relief specialist to complete the paperwork.

What Did We Learn From The Process?

A lot of time was spent figuring out our zone determination. I spoke to a city flood planning administrator who told me that this entire floor insurance rate map is so impossible to figure out that most mortgage borrowers don't even question the additional cost and pay it. Interesting enough, during our refinancing process, our prior lender sent a letter about flood insurance requirement and demanded that we pay an annual rate of $2500 that would cover a period starting on a date prior to its notification. We thought this was unfair because there was 0% that our property would have flooded, and we couldn't understand why the coverage didn't start a month after their notification. Fortunately, we didn't have to fight the prior lender since we were in the process of refinancing and did qualify for the grandfathered rate. The city flood planning administrator also told me that I should be able to take the measurement to submit to the flood insurance provider and obtain the best rate possible, but most insurance agents are not convinced without an elevation certificate from a surveyor. However, there is an insurance company, Flood Smart, we did used that promised to refund the entire premium had we received a LOMA.

A final note, the LOMA is not permanent. If the FIRM is updated, the LOMA does not protect your property, and you may have to go through LOMA again. Further, even if you were to obtain a LOMA, the lender does not have to accept the FEMA finding. The bottomline is that the potential buyer is trapped into paying this additional cost, even in sunny Los Angeles. I wonder whether this obscure process is in place to protect me, or is this just another law in place to milk the consumer? Thus, in the difficult process of refinancing, if you are in the same boat as I was, you will need to determine whether the additional cost of flood insurance makes the loan or refinance a palatable deal after all.

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