Flood Insurance | How It Works
The Trembley Group Real Estate Professionals love everything about living in Myrtle Beach and the Grand Strand. What’s not to love? There are plenty of wonderful fresh seafood and great restaurants, lots of live entertainment, world-class golf courses, a wide variety of amusements, and of course, the 60 miles of sunny beaches that make up the Grand Strand and give Myrtle Beach half of its name. Some folks have referred to Myrtle Beach and the Grand Strand as “God’s Country.” But South Carolina’s Grand Strand is also called the Low Country for good reason. Homes are never very far above sea level and in addition to the Atlantic Ocean, there are rivers, swamps, and ponds everywhere. In Myrtle Beach and along the Grand Strand, homes are never far from water. It’s a big part of what makes the area so special.
According to the National Flood Insurance Program, “Just a few inches of water from a flood can cause tens of thousands of dollars in damage.” To mitigate their risk and protect their collateral, mortgage lenders sometimes require borrowers to carry flood insurance.
Many homebuyers never learn about the flood insurance requirements until their property is in escrow. Homeowners are sometimes unaware that many areas that do not appear to be at high risk of flooding are in fact rated high risk by the Federal Emergency Management Agency (FEMA). Homeowners do not want to be caught in this situation and caught off guard. An in-depth discussion with a Trembley Group Real Estate Professional will demystify the lender-required flood insurance process.
Why Do Lenders Require Flood Insurance?
Typically, homeowners insurance policies (also called hazard insurance) do not cover flooding. Flooding is only covered by a separate insurance product called flood insurance. Flood insurance is usually optional for mortgaged homeowners in what are normally considered low-risk flood areas. It may even be optional for mortgaged homeowners in high-risk flood areas, depending on the mortgage product. However, homeowners who take out a mortgage from a lender that is federally regulated or insured (such as an FHA mortgage) and buy a home in a high-risk flood zone (also known as a Special Flood Hazard Area) will be required to buy flood insurance. In most cases, the homeowner will have to pay for flood insurance every year until the mortgage is paid off.
When someone takes out a mortgage, the home serves as collateral if the borrower stops making mortgage payments. When a property is financed with a mortgage loan, the lender usually has a greater financial interest in the home than the borrower. If the mortgage lender’s collateral is damaged by flood waters and the borrower abandons the home and stops making mortgage payments, the lender is caught in a losing position and is stuck with the damaged property. To eliminate this risk, many lenders require the homeowner to purchase flood insurance.
The homeowner is not likely to walk away from a damaged home when it can be repaired or rebuilt at minimal cost. Flood insurance will provide money to repair or even rebuild a home if it is damaged or destroyed by flooding. The homeowner will keep the home and keep making mortgage payments. If the homeowner has to file a claim, he or she will only be responsible for paying the deductible. If the homeowner cannot pay the deductible, which may be as high as $5,000, there is still some risk that the homeowner could walk away. Also, since flood insurance coverage has a maximum of $250,000, an owner might be tempted to walk away from a property that will cost significantly more to repair or rebuild.
How Does Flood Insurance Work?
Flood insurance works just like other insurance product. The insured – the homeowner – pays an annual premium based on the property’s flood risk and a mutually agreed upon deductible. If the property is damaged or destroyed by flooding, the homeowner receives the cash required to repair the damage, up to the policy limit.
The homeowner must secure the flood insurance policy before closing on a property and renew it every year to cover the principal balance on the loan. The lender will usually collect flood insurance payments along with the monthly mortgage payment, hold the funds in an escrow account, and pay the entire premium to the insurance company once a year (similar to how property taxes and hazard insurance are handled). Once the homeowner secures the initial policy, no further action may be required except for making the monthly mortgage payments. Separate coverage of up to $100,000 for personal belongings is also available.
Is Flood Insurance Required?
Any property’s flood risk can be researched at FloodSmart.gov. If the website says the property is in a high-risk area, flood insurance will likely be required. The final decision depends on flood insurance rate maps and an official flood zone hazard determination. You can see the maps yourself at FEMA.gov. A lender is always one of the best sources of flood insurance requirements.
In some neighborhoods or even entire cities, it may be difficult to find a home that is not in a high-risk flood area. In other regions, it may be possible to avoid carrying flood insurance entirely.
How to Obtain Coverage
The National Flood Insurance Program (NFIP), managed by FEMA, offers flood insurance to homeowners in communities that participate in the program. The program requires participating communities to “adopt and enforce ordinances that meet or exceed FEMA requirements to reduce the risk of flooding.” This program also offers a small discount on flood insurance based on the steps communities take to mitigate flood risks.
The actual insurance policies are issued by private insurance companies, not by FEMA. You can find a participating insurance company at the FEMA website. Better yet, ask The Trembley Group Real Estate Professional for recommendations. They are professionals in everything Myrtle Beach real estate and know the reputation of any insurance agent offering flood insurance.
How Much Does Flood Insurance Cost?
The cost to insure a property against flood damage is determined by the risk associated factors such as the year of building construction, number of floors, level of flood risk and the amount of coverage required by a lender. This amount should be based on the cost to rebuild, which can be obtained from your homeowner’s insurance company.
The price to insure a property with a particular deductible and particular amount of coverage will be the same no matter who is chosen as the insurer because flood insurance premiums are government regulated. However, there is some control over the cost of a policy when choosing the deductible amount.
To find out how much flood insurance will cost for a specific residence, simply complete the flood risk profile on the FEMA website and contact one of the participating insurance agents listed. The website only gives an approximate range of possible coverage costs. An insurance agent can give an accurate quote. You can still get a quote even if the homebuyer is just looking at the property and it isn’t under contract. In general, expect to pay at least a few hundred dollars for flood insurance.
The maximum insurance coverage allowed by law is $250,000 for the structure. Contents coverage is optional – it is not required by a lender – but it costs extra (and is limited to $100,000).
Don’t assume that flood insurance will cost a lot of money, depending on where you live, peace of mind may not have that high a price tag.
It takes 30 days for an insurance policy to take effect, so don’t wait until the last minute.
What’s Exactly Covered?
According to FEMA, the following items are considered part of the building’s structure and are covered by flood insurance:
- The building’s and including its foundation
- The electrical and plumbing systems
- Central air conditioning equipment, furnaces, and water heaters
- Refrigerators, cooking stoves and built-in appliances such as dishwashers
- Permanently installed carpeting over an unfinished floor
- Permanently installed paneling, wallboard, bookcases, and cabinets
- Window blinds
- Detached garages up to 10% of building’s coverage (detached buildings other than garages require a separate building property policy)
- Debris removal
What Isn’t Covered?
As specified by FEMA, lots of important and expensive things are not covered by flood insurance. You’ll have to purchase additional personal property coverage if you are worried about the cost of replacing the following items:
- Personal belongings such as clothing, furniture, and electronic equipment
- Portable and window air conditioners
- Portable microwave ovens and portable dishwashers
- Carpets not included in building coverage (see above)
- Clothes washers and dryers
- Food freezers and the food in them
- Certain valuable items such as original artwork and furs
Additionally, neither building flood insurance nor personal property flood insurance will cover the following:
- Damage caused by moisture, mildew or mold that could have been avoided by the property owner
- Currency, precious metals and valuable papers such as stock certificates
- Property and belongings outside of a building such as trees, plants, wells, septic systems, walks, decks, patios, fences, seawalls, hot tubs, and swimming pools
- Living expenses for temporary housing
- Financial losses caused by interruption of business or loss of use of insured property
- Most self-propelled vehicles such as cars, including their parts
Other Flood Insurance Considerations
Flood insurance is expensive and like other more common forms of insurance can make homeownership less affordable or even unaffordable for some people. It’s important to calculate the long-term cost of flood insurance before committing to a property. Multiply the annual cost of flood insurance policy by the length of the mortgage. If the annual cost of a policy is $1,000 and the mortgage term is a typical 30 years, the cost of owning the home over the term of the mortgage will be an additional $30,000.
Replacement vs. Maximum Coverage
Some flood insurance companies will try to make you buy insurance for the maximum of $250,000 even if the lender doesn’t require this much coverage. If the principal amount of a loan is only $200,000, the extra coverage is not necessary. Look at the replacement value for your house as determined by your homeowners’ insurance company. This is the full the amount of insurance you need to purchase. The insurance only needs to cover the value of the physical structure, not the land.
Finally, the maximum allowed coverage of $250,000 may not be sufficient to rebuild some properties. If a homeowners’ insurance company says it will cost more than $250,000 to rebuild your property in the event of a total loss, a homeowner should be aware of the risk even with the flood insurance coverage.
Avoiding Lender-Required Flood Insurance
There are several options for avoiding lender-required flood insurance, though they are not a good idea for everyone, especially those living in high-risk areas.
Research before buying – find properties that aren’t in flood-prone zones.
A survey (usually $1,500 or less) will see if a specific building has a high enough elevation to avoid flood insurance. Sometimes flood insurance is not required for a particular property even when other homes in the area do require a policy. Only a small corner of a property may be in the floodplain and it is sometimes possible to get an exemption if you can prove that your property is not at high risk.
Organize your community and work with local government to do things to mitigate flood risk to the point where the area is no longer in a high-risk flood zone.
What If You Don’t Live in a FEMA Flood Zone?
Flood insurance is even a good idea for some folks who don’t live in a designated FEMA flood zone. Last year, Tropical Storm Irma hit the entire Grand Strand with a vengeance, dumping inches of rain from Georgetown to Little River. Many non-FEMA flood areas received extensive flooding. Many areas of Georgetown, Pawleys Island, Garden City, Surfside Beach, Myrtle Beach, and North Myrtle Beach were inundated with flood waters and many residents without flood insurance were left, excuse the expression, high and dry. If unsure about the necessity of flood insurance, homebuyers are encouraged to consult their purchase with a Trembley Group Real Estate Professional and a reputable flood insurance agent.
A flood insurance requirement shouldn’t be an ugly surprise when purchasing a house. Educating yourself now can help you understand when lenders require flood insurance, how to reduce its cost, or in some cases, even how to avoid it altogether. A Trembley Group Real Estate Professional does a lot of things for his/her clients and one of the most important services they provide is an educator. Call a Trembley Group Real Estate Professional to learn everything you need to know.
Need help? Call your friendly Trembley Group Real Estate Professional, or a Client Care Specialist at 843.945.1880 ext. 1 and we’ll help you look for the perfect home for your needs and desires!
At The Trembley Group, we pride ourselves on being the experts at more than just selling real estate. We are local residents, some of us have been here for a lifetime. The rest of us will be here until the end of time. We love living, working, and playing in the diverse backyard of Coastal Carolina, and look forward to helping you live and love your dreams soon too. Please reach out to us by phone or email for personalized service and one-on-one advice.
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