FHA borrowers better served by private flood insurance

Private flood insurance often provides better coverage at a lower price when compared to the National Flood Insurance Program (NFIP), but this is especially true for homeowners with lower incomes. Here, A vehicle sits submerged in flood water following Tropical Storm Imelda in Fannett, Texas, U.S., on Fri., Sept. 20, 2019. (Sergio Flores/Bloomberg)

A recent study that my company, Poulton Associates, LLC, did in conjunction with HazardHub discloses that those with lower incomes pay a higher rate than those with higher incomes through the National Flood Insurance Program (NFIP). This is especially significant when examined in concert with FHA (Federal Housing Administration) insured borrowers because the FHA was created to assist lower-income borrowers in keeping their monthly mortgage payments as low as possible. It seems only natural, therefore, that the FHA would champion private flood insurance as a less costly alternative to the NFIP.

Fortunately, the U.S. Department of Housing and Urban Development (HUD) appears ready to join the rest of the lending community by accepting private flood insurance. The public comment period just closed on a proposed rule issued by HUD that, if finalized, would remove internal guidelines that have limited borrowers to the use of NFIP coverage only. As in the past, FHA borrowers whose properties are located in a Federal Emergency Management Agency (FEMA) Special Hazard Flood Area are required to secure flood insurance before an FHA loan can be approved. If this rule is finalized, they will finally be able to do so using private flood insurance products.