Why am I being charged a flood certification fee when the home I am getting a mortgage on is not located on a flood plain?
Depending on where your home is located, you may be required to pay a flood certification fee when you get a mortgage. This extra cost can create confusion for borrowers, especially if the property being financed is nowhere near a flood zone. Why are you required to pay this extra closing cost if your home is not at risk of flooding?
The answer is that you are charged a flood certification fee to verify that your property does not reside in a flood zone. The fee pays for a third party to review detailed government-produced flood zone maps to determine if your property lies within a flood zone. After reviewing your property location and the applicable maps, the flood certification company issues a certificate with its findings.
In a best case scenario, the flood certification confirms that the property you are getting a mortgage on is not located in a flood zone and exposed to potential flood damage. In this case, you should be happy to pay the flood certification fee because it means you are not required to purchase flood insurance.
If the flood certification process shows that your property is located in a flood zone or at risk of potential flood damage, the lender requires that you purchase flood insurance, which can be challenging to obtain and expensive.
It is important to determine if you are required to buy flood insurance early in the mortgage process so you can budget for this extra expense. The additional cost may also impact what size mortgage you qualify for and if you can afford the home you want to buy.
The lender requires that you buy flood insurance in addition to the homeowners or hazard insurance you are also required to obtain to qualify for the mortgage. This is because homeowners insurance policies typically exclude flood damage. We recommend that you review your homeowners insurance policy closely to determine what type of property damage is covered as you may be surprised how limited the coverage is.
While both homeowners and flood insurance benefit you (the policy holder) in the event of property damage, they also protect the lender. Your mortgage is secured by your property and if your home incurs significant damage due to a fire, flood or other event, the value of the lender’s collateral may decrease substantially, increasing the risk that you cannot repay your mortgage.
In a worst case scenario, you may walk away from the property and stop paying your mortgage and the lender may not be able to recover its outstanding loan balance. This is why lenders mandate the borrowers have both homeowners insurance and flood insurance, depending on where your property is located and the results of the flood certification report.
The good news is that the flood certification fees is relatively inexpensive, usually around $20 or less for many properties in most states, which is a relatively small price to pay if it means you are not required to buy flood insurance. For certain properties in more highly regulated states such as New York, the fee can run several hundreds of dollars, although this is relatively uncommon nationally and depends on the specific property.
Please note that in addition to the flood certification fee you may also be required to pay a one-time flood monitoring fee of approximately $40 as part of your mortgage closing costs. The flood monitoring fee is paid to a third party that tracks flood zone maps to make sure that your property is not located in a flood zone in the future due to government remapping. If mapping changes place your home in flood zone after your mortgage closes, your lender may require you to purchase flood insurance.
Sources
"B7-3-07, Flood Insurance Coverage Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
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