Mandatory Purchase Requirement

Where it Applies
The mandatory purchase requirement applies to all forms of federal or federally related financial assistance for buildings located in Special Flood Hazard Areas (SFHAs). This requirement affects loans and grants for the purchase, construction, repair, or improvement of any publicly or privately owned building in the SFHA, including machinery, equipment, fixtures, and furnishings contained in such buildings.

Financial assistance programs affected include loans and grants from agencies such as the Department of Veterans Affairs, USDA Rural and Housing Services, Federal Housing Administration, Small Business Administration, and Federal Emergency Management Agency.

The requirement applies to secured mortgage loans from financial institutions, such as commercial lenders, savings and loan associations, savings banks, and credit unions that are regulated, supervised or insured by Federal agencies such as the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. The requirement comes into play if a loan is made, increased, renewed or extended - at any of those steps, the lender must check to see if the building is in an SFHA at that time. For example, a building in an X Zone when the original mortgage was taken out would be affected if the area is remapped in the SFHA and the loan is later refinanced. The requirement also applies to all mortgage loans purchased by Fannie Mae or Freddie Mac in the secondary mortgage market.

How it Works
Before a person can receive a loan or other financial assistance from one of the affected agencies or lenders, there must be a check to see if the building is in an SFHA on the Flood Insurance Rate Map (FIRM). It is the agency's or the lender's responsibility to check the FIRM to determine if the building is in an SFHA, although many communities provide assistance.

Usually, the lender will have the determination done by a third party flood hazard determination company that provides a guarantee that the determination is correct. The lender must document the determination and whether flood insurance is required on a Standard Flood Hazard Determination Form (FEMA Form 81-93). The lender will notify the borrower if flood insurance is required.

If the building is in an SFHA, the agency or lender is required by law to require the recipient to purchase a flood insurance policy on the building. The requirement is for building coverage equal to the value of building (not the land), the amount of the loan (or other financial assistance) or the maximum amount of flood insurance available, whichever is less.

The mandatory purchase requirement does not affect loans or financial assistance for items that are not covered by a flood insurance policy, such as vehicles, business expenses, landscaping, and vacant lots. It does not affect loans for buildings that are not in the floodplain, even though a portion of the lot may be flood-prone. While not mandated by law, a lender may require a flood insurance policy as a condition of a loan for a property in any zone on a FIRM.

*Taken from the FEMA Flood Insurance and Flood Management Document. In order to view this document in its entirety, please visit the following: Flood Insurance Information.