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Beware of Flood Insurance! Full Payment Up Front

Photo of a brick house under water due to a flood. Every lender is required to screen every property for flood zone status. Flood insurance can be brutal.

We recently had a transaction in Oakland that required our buyer to pay almost $8,000 up front (prior to close) so we could obtain our required evidence of flood insurance. Similarly, we had a small transaction in a Contra Costa County suburb that required a $5,300 upfront payment. In both cases, the buyers were caught completely off guard – by both the amount and by the requirement to pay upfront.

Every lender is required to screen every property for flood zone status. If a property is in a particular flood zone, buyers have to purchase flood insurance. The zone requiring insurance is usually one where there is a one percent chance of flooding (a “100 year flood zone”).

Premiums vary significantly depending on a property’s elevation (relative to the flood plain) and exact flood zone designation, e.g. A, D, V, X, etc. Here are some important facts to note.

1. Premium Amounts: We see premiums vary from as little as $40 per month to well over $500 per month, but the large premiums are not unusual.

2. Insurance Providers: Insurance can be obtained through FEMA (the gov’t) directly, or via private insurers such as USAA, The Hartford, CSAA, NCIP, and Palomar (these are all companies we have used for flood insurance).

3. Full Payments Up Front: Flood insurance providers will not provide the necessary “evidence of insurance” until they have received an entire year’s premium. Hence, lenders cannot even order loan documents until borrowers pay the full flood insurance premium.

4. Flood Zones Not Set In Stone. We have seen buyers fight their flood zone designations and win. In one case, for example, a buyer hired a surveyor to prove that only the property’s barn was in the flood zone, while the dwelling was not; this saved the borrower thousands in annual premiums.

You can use this FEMA link to see if a property is in a Flood Zone. And you can get more information in regard to flood insurance here.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167