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If we make a construction loan and the property is in a SFHA, after determining the minimum amount of flood insurance needed, would we need to require that full amount prior to origination, even though the home is not yet built? Does the regulation allow handling construction loans on properties located in SFHAs any differently? i.e. since the property is not yet improved, then the insurance would not have to begin until later, and the home would not actually have a roof and walls until later…etc…
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Replies
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From the Interagency FAQ:
22. When must a lender require the purchase of flood insurance for a loan secured by a building in the course of construction that is located in an SFHA in which flood insurance is available?
Answer: Under the Act, as implemented by the Regulation, a lender may not make, increase, extend, or renew any loan secured by a building or a mobile home, located or to be located in an SFHA in which flood insurance is available, unless the
property is covered by adequate flood insurance for the term of the loan. One
way for lenders to comply with the mandatory purchase requirement for a
loan secured by a building in the course of construction that is located in an
SFHA is to require borrowers to have a flood insurance policy in place at the
time of loan origination. Alternatively, a lender may allow a borrower to defer the purchase of flood insurance until either a foundation slab has been poured and/or an elevation certificate has been issued or, if the building to be constructed will have its lowest floor below the Base Flood
Elevation, when the building is walled and roofed.12 However, the lender must
require the borrower to have flood insurance in place before the lender disburses funds to pay for building construction (except as necessary to pour the slab or perform preliminary site work, such as laying utilities, clearing brush, or the purchase and/or delivery of building materials) on the property securing the loan. If the lender elects this approach and does not require flood insurance to be obtained at loan origination, then it must have adequate internal controls in place at origination to ensure that the borrower obtains flood insurance no later than
when the foundation slab has been poured and/or an elevation certificate has been issued.The FAQ is linked here: https://www.fema.gov/media-library-data/20130726-1742-25045-4927/interagency_q_a.pdf
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