The Federal Housing Administration (FHA) is proposing to expand flood insurance options for homeowners with FHA-insured mortgage loans. If approved, the move will open the door to more affordable and more comprehensive coverage for some FHA loan borrowers.

Key Takeaways

  • The Federal Housing Administration (FHA) has announced a proposal that would make it possible for homeowners with FHA-insured loans to obtain flood insurance from private insurers.
  • Since 1999, the agency has required borrowers to purchase coverage through the National Flood Insurance Program (NFIP), which is often more expensive and less comprehensive than what private policies can provide.
  • Private flood insurance policies must still meet FHA specifications to be eligible.
  • The rule is not yet finalized, but the gears are in motion, with support from the insurance industry.

Broadening Access to Private Flood Insurance

The FHA’s latest move is actually a little behind the times. In February 2019, federal regulators issued a joint final rule to require regulated financial institutions to accept flood insurance policies purchased from private insurers in addition to those purchased through the National Flood Insurance Program (NFIP). 

That rule took effect in July 2019 but did not apply to FHA loans unless the agency is a direct lender. FHA loans are only insured by the agency and not originated, so for them it was still business as usual.

Because private lenders already accept private insurance on other loan types, the change won’t make too many waves in the process. However, it could help reduce the burden of debt the NFIP carries—a whopping $20 billion as of October 2020.

How the New Rule Could Benefit Homeowners

An FHA loan is often the best mortgage option for first-time homebuyers and borrowers with low to moderate incomes. Its low down payment and credit score requirements can make it more obtainable than conventional mortgage loans.

But if you get an FHA loan and live in an area where you need flood insurance, the agency currently requires that you purchase your coverage through the NFIP, a rule established in 1999. 

Unfortunately, policies from the NFIP are often less comprehensive and more expensive than the policies homeowners can purchase directly from private insurance companies. With an updated regulation, FHA loan borrowers will not only have a wider selection of policies to choose from but access to potentially better and less costly ones.

It’s a particularly timely announcement, considering the 2020 hurricane season is already the busiest ever recorded.

The FHA anticipates that between 3% and 5% of FHA borrowers would take advantage of the new rule and switch to a private flood insurance policy.