Flood insurance and the NFIP: rules, limits and cost

Who has to buy it?

Congress directs federal lending regulators to bar regulated lenders from making, increasing, extending or renewing a loan secured by a building in an area identified as having special flood hazards, unless flood insurance covers the building and the personal property securing the loan for the term of the loan. The amount must be at least the outstanding principal balance or the maximum available under the National Flood Insurance Program (NFIP), whichever is less (42 U.S.C. 4012a(b)). Lenders must also accept private flood insurance that meets the same requirements.

FEMA summarizes it this way: homes and businesses in high-risk flood areas with mortgages from government-backed lenders are required to have coverage. Fannie Mae requires flood insurance for properties in an SFHA on loans it buys, in an amount equal to the lesser of 100% of the replacement cost of the improvements, the NFIP maximum or the unpaid loan balance. It also caps the flood deductible at the maximum NFIP offers for one- to four-unit homes. All flood zones beginning with “A” or “V” count as SFHAs, and a lender can drop the requirement if FEMA issues a letter saying its maps were amended and the structure is no longer in an SFHA.

If your home is outside an SFHA, no federal law forces you to buy. Flood insurance is still available, and it is often a good idea, because FEMA states that most homeowners insurance does not cover flood damage. See homeowners insurance.

What does NFIP cover?

The NFIP sells a Standard Flood Insurance Policy through FEMA’s NFIP Direct and through private insurers in its Write Your Own program. For a one- to four-family home, the limits are:

Source: FEMA; the building figure also appears in 42 U.S.C. 4013(b). If the loan is larger than the NFIP maximum, the lender’s required amount stops at the NFIP maximum (42 U.S.C. 4012a(b)).

How is the premium set under Risk Rating 2.0?

FEMA’s pricing approach, called Risk Rating 2.0, prices each property by its own flood risk instead of by zone and elevation alone. It looks at:

• the likelihood of different types of flood, such as river overflow, storm surge, coastal erosion and heavy rainfall;
• the building: foundation type, first-floor elevation and replacement cost;
• distance to coasts, rivers and lakes;
• flood-proofing features such as flood vents, and levee performance.

New policies became subject to the approach on October 1, 2021, existing policies at renewal on or after April 1, 2022, and FEMA says it was fully implemented on April 1, 2023. By law, rates for most policyholders cannot rise by more than 18% a year until they reach the full risk-based rate.

FEMA does not publish one “average” price for the whole country on these pages. For single-family policies in force on August 31, 2023, 37% cost $0 to $1,000 a year and 32% cost $1,000 to $2,000. Your quote depends on the specific address. Ask for one before you make an offer, because the premium belongs in your monthly budget alongside the escrow account.

What is the 30-day waiting period?

By statute, a new flood policy takes effect 30 days after the application is complete and the first premium is paid (42 U.S.C. 4013(c)(1)). The law makes an exception for the initial purchase made in connection with the making, increasing, extension or renewal of a loan (4013(c)(2)(A)). FEMA’s page puts it plainly: there is “typically” a 30-day waiting period, with exceptions for lender-mandated coverage and for community flood-map changes. Plan the application early so that coverage is in force before you need it.

Where states differ

The NFIP rules above are the same in every state. What differs is where the flood maps place your address, and any rules your state or city adds on top. For states we cover in detail, see Texas natural hazards and insurance and California natural hazards and insurance.