If you are considering buying a home, its important to understand the insurance that is required. In Florida, you typically need three types of policies including, hazard insurance, wind insurance, and flood insurance. The first two types, hazard and wind, are typically quoted in one premium. While the rates for these two spiked in 2004 and 2005, they have came down significantly since then. However, flood insurance is a different matter and requires further discussion.
The National Flood insurance Program (NFIP) is federally subsidized and administered by the Federal Emergency Management Agency (FEMA). Some key aspects fo NFIP are:
1. Properties across the United States are rated by FEMA and assigned to specific zones based on the properties elevation. For example, AE, V, ZX, etc. Flood zone x is the best. This means that flood insurance is not required in order to obtain most types of financing. However, many people purchase it anyway.
2. In addition to the flood zone, certain areas along the coast are designated to be in “Coastal Barrier Resource Zones” (CBRA). Properties in CBRA zones are not eligible for FEMA Flood insurance. They are third party companies that will provide coverage, but these are very expensive.
3. The majority of flood insurance in the United States is underwritten by the Federal Government. This is a tax payer subsidized program and insurance rates are typically below true economic costs. For example, if a property qualifies for FEMA flood, the premium for any property would typically be less than $1000 per year.
4. FEMA Flood insurance is NOT AVAILABLE in Coastal Barrier Zones regardless of the flood elevation. This is significant, especially for buyers that will be obtaining financing.
5. The alternative to FEMA flood insurance is to purchase coverage from a private insurer. These policies are typically very expensive and price prohibitive for most buyers.
6. If a property is in a flood zone other than X and located in a CBRA zone, you will not be able to obtain conventional or government assisted financing. These means you will either need to pay cash or limit your search to exclude these homes.
If you buy a home, make sure that you determine the flood zone prior to getting too far along in the process. You don’t want to pay for inspections, appraisals, and other expensive items only to find out that the property doesn’t qualify for financing or that your flood insurance premiums will be expensive.
The good news is that there are many homes available that don’t require flood insurance. Practically speaking, buyers should concentrate on these and forget about the perils associated with those located in CBRA zones or flood prone areas. A good real estate broker will be able to point you in the right direction. However, if you do decide to purchase in a CBRA flood zone, make sure the price is discounted to account for the additional risks.
