Mandatory Purchase of Flood Insurance


Map Information and the Flood Insurance Requirement

Most Common Question:  Why does my mortgage lender require flood insurance?

Under federal law, the purchase of flood insurance is mandatory for all federal or federally related financial assistance for the acquisition and/or construction of buildings in high-risk flood areas (Special Flood Hazard Areas or SFHAs).

The amount of flood insurance coverage required by the Flood Disaster Protection Act of 1973, as amended by the National Flood Insurance Reform Act of 1994, is the lesser of the following:

  1. The maximum amount of NFIP coverage available for the particular property type, or
  2. The outstanding principal balance of the loan, or
  3. The insurable value of the structure.

If the property is not in a high-risk area, but instead in a moderate-to-low risk area, federal law does not require flood insurance; however, a lender can still require it.  It is recommended since historically about one-in-four flood claims come from these moderate-to-low risk areas.  Note that if during the life of the loan the maps are revised and the property is now in the high-risk area, your lender will notify you that you must purchase flood insurance.


The FIRM and Mandatory Purchase of Flood Insurance

For compliance with the mandatory purchase requirements of the National Flood Insurance Program, the current Flood Insurance Rate Map (FIRM) (or Letter of Map Change) is the only legal document allowed to be used by lenders or third-party vendors.


How to Explain the Mandatory Purchase of Flood Insurance to your Community and Citizens

Often, the community receives inquiries about a property location for a map determination on the FIRM.  Questions also may come from a real estate agent, a bank or a citizen who contacts the community to ask why they are required to buy flood insurance.

If a property is in an SFHA, the community should inform the inquirer of the mandatory flood insurance purchase requirement.  The best way to advise an inquirer that flood insurance is required is to provide a written summary of the requirement. 

Download  A sample community handout – About the Mandatory Purchase of Flood Insurance.  Post your community name in the letterhead of the Word document and provide it to anyone who asks about flood insurance or flood mapping.   For CRS purposes, this fulfils one outreach component for Activity 320 – Map Information Service.


Following is the sample for community purposes.  

— A sample handout about the mandatory purchase of flood insurance —


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 area visit or

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.






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