General Flood Insurance Requirements for Lenders

A lender must meet flood insurance requirements if they offer flood insurance protection to homeowners. The Federal Emergency Management Agency (FEMA) through the Office of National Flood Insurance Program (NFIP) runs the program. Lenders providing food insurance in behalf of NFIP must be approved in order to do so.

Provided to Homeowners in Targeted Areas

Flood insurance through NFIP can only be provided to those homeowners who live in targeted flood zones. There are areas of the country that have been identified as targeted flood areas most prone to flooding. The resources of the federal government are directed through NFIP in order to meet the needs of those communities and homeowners that are most affected by flooding.

Coverage Amount Equal to Actual Amount of Loss

Additionally, lenders may only require the amount of flood insurance that matches the amount of the homeowner’s liability to the lender. For example, a home with a $150,000 mortgage and $25,000 in equity that is located in a targeted flood zone may only require flood insurance of $125,000 ($150,000 - $25,000 = $125,000). The purpose of the program and a lender’s participation is to ensure that the lender is made whole in the event of flood damage or devastation.