What is the Connection Between Flood Insurance and a Mortgage?

The correlation between flood insurance and a mortgage is that many mortgage lenders require that homeowners have flood insurance before they can borrow the money necessary to buy the home. Mortgage lenders do not want to be left with nothing in the case of a flood that damages or destroys the property. These lenders essentially own the property until the entirety of the mortgage loan is paid back. Potential buyers must understand the connection between flood insurance and a mortgage before they proceed to buy their home.

A typical mortgage agreement is a loan between a mortgage company and a prospective home buyer, who is usually forced to give a down payment and is then loaned the rest of the cost of the home. Regular payments are made by the home buyer to the lender, along with interest payments at a rate determined at the start of the agreement. Should the buyer default on his scheduled payments, the lender essentially takes possession of the home. For that reason, both buyers and lenders should be concerned with the relationship between flood insurance and a mortgage.

In the United States, different areas of the country are designated as high-risk areas for floods, depending on factors like their location and climate. Most lenders require that all home buyers in such high-risk areas have corresponding flood insurance to protect against rising waters. Since this is the case, flood insurance and a mortgage are intertwined for the buyer of the home.

If no flood insurance is purchased, both the buyer and the lender would be damaged by a flood that does some degree of damage to the home. The buyers would lose out on their investment in the home and might lose their place of residence as well. As for the mortgage company, it would lose out on the collateral it had that was securing the loan. Flood insurance could help ease the financial blow to all parties if a flood occurred.

It is important to note that some mortgage lenders may require flood insurance for homes that aren't necessarily located in areas susceptible to floods. Home buyers who go to lenders like this could end up paying heavy premium payments for insurance that they aren't likely to need. Over the course of a mortgage, those payments can add up to a significant amount that could be better used elsewhere. For that reason, buyers should consider shopping around to other mortgage lenders if they feel that a specific lender's demands for flood insurance are unfair.