Legal Authority
Yes, mortgage companies can legally require you to purchase flood insurance under specific circumstances. This authority stems primarily from federal regulations and contractual rights established in your mortgage agreement. If your property is located in a designated Special Flood Hazard Area (SFHA) and you have a federally regulated or insured mortgage, your lender is legally required to ensure you maintain flood insurance coverage throughout the loan term.
Federal Requirements
The Flood Disaster Protection Act mandates that properties within high-risk flood zones with mortgages from federally regulated or insured lenders must carry flood insurance. This isn't optional for lenders—they face potential penalties for non-compliance. These requirements apply to loans from banks, credit unions, mortgage companies, and other financial institutions that are federally regulated or have federally insured deposits.
Force-Placed Insurance
If you fail to maintain the required flood insurance, your mortgage company can purchase a policy on your behalf through a process called "force-placed insurance." This typically occurs after you've been notified of the requirement and given an opportunity to obtain coverage yourself. Force-placed policies are often significantly more expensive than policies you could purchase directly, and these costs are added to your mortgage payments.
Beyond Federal Requirements
Even outside mandatory federal requirements, most mortgage contracts include clauses giving lenders the right to require insurance that protects their financial interest in the property. This means that in some cases, lenders may require flood insurance even if not strictly mandated by federal law, particularly if flood risk assessments change during your loan term.
Disputing Flood Zone Designations
If you believe your property has been incorrectly classified as being in a high-risk flood zone, you can request a Letter of Map Amendment (LOMA) from FEMA. If approved, this may eliminate the mandatory flood insurance requirement, though your lender might still require coverage based on their risk assessment.
Private Mortgage Considerations
Private mortgages not backed by federal programs may have different requirements, but most still include contractual provisions allowing lenders to require flood insurance as a condition of the loan, particularly for properties in flood-prone areas.