When buying a home, your mortgage lender uses a flood risk rating to evaluate the likelihood of your property flooding, which influences whether you must carry flood insurance. This rating is primarily based on the Federal Emergency Management Agency’s (FEMA) Flood Insurance Rate Maps (FIRMs). These maps categorize properties into flood zones, with the highest risk zones designated as Special Flood Hazard Areas (SFHAs).
An SFHA is officially designated as having at least a 1% annual chance of flooding, sometimes called the “100-year floodplain.” However, this means there is a 1-in-100 chance each year of flooding, which adds up to about a 26% risk over a 30-year mortgage period (source: FEMA).
If a property falls within an SFHA, federal law mandates that loans from federally regulated or insured lenders require the borrower to maintain flood insurance for the life of the loan. This mandatory insurance protects both the homeowner and the lender against potential financial losses due to flood damage.
Since 2021, FEMA has implemented Risk Rating 2.0, an updated flood insurance rating system that calculates premiums based on individual property characteristics rather than solely on flood zone designation. This includes factors like the home’s elevation, proximity to flood sources, rebuilding costs, and flood type, aiming to align insurance premiums with the actual risk (source: FEMA.gov).
Despite the new system, flood zone designations still determine insurance requirements. The main flood zones include:
- Zones A, AE, AH, V, VE: High-risk SFHAs with mandatory flood insurance requirements.
- Zones B, C, X: Moderate to low risk where flood insurance is optional but often recommended.
- Zone D: Areas with undetermined risk due to lack of detailed analysis.
For example, a homebuyer purchasing in Zone VE, a coastal high-risk zone, will be required to provide proof of flood insurance before loan closing. Conversely, in Zone X, flood insurance may be optional but still wise.
Common misconceptions include believing homeowners insurance covers floods—which it generally does not—and assuming flood risk only applies in high-risk zones. In reality, over 25% of flood claims come from outside SFHAs.
Homebuyers can research flood risk at no cost through FEMA’s Flood Map Service Center (https://msc.fema.gov/portal/home) and may benefit from obtaining an Elevation Certificate or applying for a Letter of Map Amendment (LOMA) to potentially reduce insurance costs.
Understanding flood risk ratings helps borrowers comply with lender requirements and budget accurately for flood insurance, ultimately protecting their investment.
For related information, see our articles on Flood Hazard Area Determination and Insurance Requirements on Liened Properties.