About the Mandatory Purchase of Flood Insurance
The NFIP: The National Flood Insurance Program (NFIP) is a federal program enabling
property owners in participating communities to purchase flood insurance on eligible buildings
and contents, whether they are in or out of a floodplain. This community participates in the
NFIP, making federally backed flood insurance available to its property owners.
The NFIP insures most walled and roofed buildings that are principally above ground on a
permanent foundation, including mobile homes, and buildings in the course of construction.
Property owners can purchase building and contents coverage from any local property and
casualty insurance agent. To find a local insurance agent that writes flood insurance in your
Mandatory Purchase Requirement: Pursuant to the Flood Disaster Protection Act of 1973
and the National Flood Insurance Reform Act of 1994, the purchase of flood insurance is
mandatory for all federal or federally related financial assistance for the acquisition and/or
construction of buildings in Special Flood Hazard Areas (SFHAs). An SFHA is defined as any
A or V flood zone on a Federal Emergency Management Agency (FEMA) Flood Insurance
Rate Map (FIRM).
The mandatory purchase requirement also applies to secured loans from such financial
institutions as commercial lenders, savings and loan associations, savings banks, and credit
unions that are regulated, supervised, or insured by federal agencies, such as the Federal
Reserve, the Federal Deposit Insurance Corporation, the Comptroller of Currency, the Farm
Credit Administration, the Office of Thrift Supervision, and the National Credit Union
Administration. It further applies to all loans purchased by Fannie Mae or Freddie Mac in the
secondary mortgage market.
Federal financial assistance programs affected by the laws include loans and grants from
agencies such as the Department of Veterans Affairs, Farmers Home Administration, Federal
Housing Administration, Small Business Administration, and FEMA disaster assistance.
How it Works: When making, increasing, renewing, or extending any type of federally
backed loan, lenders are required to conduct a flood zone determination using the most
current FEMA FIRM to determine if any part of the building is located in an SFHA. If the
building is in an SFHA, the federal agency or lender is required by law to provide written
notification to the borrower that flood insurance is mandatory as a condition of the loan. Even
though a portion of real property on which a building is located may lie within an SFHA, the
purchase and notification requirements do not apply unless the building itself, or some part of
the building, is in the SFHA. However, lenders, on their own initiative, may require the
purchase of flood insurance even if a building is located outside an SFHA. Up to 25% of all
NFIP flood losses arise from outside SFHAs (B, C, and X Zones).
Under federal regulations, the required coverage must equal the amount of the loan
(excluding appraised value of the land) or the maximum amount of insurance available from
the NFIP, whichever is less. The maximum amount of coverage available for a single-family
residence is $250,000 and for non-residential (commercial) buildings is $500,000. Federal
agencies and regulators, including government-sponsored enterprises, such as Freddie Mac
and Fannie Mae, may have stricter requirements.