As a borrower, there are several important rules to be aware of when it comes to flood insurance. With the majority of mortgage loan transactions requiring the purchase of this type of protection, it’s particularly crucial to understand the most common mistake buyers make when it comes to this type of insurance: flood insurance lapses. Basically, your flood insurance can lapse if you fail to make a payment or disregard renewal when your insurance is near expiration. When this happens, the borrower could be subject to higher rates when purchasing new flood insurance and may be sited by the lender as a violation. So what should you do if your flood insurance lapses? Let’s take a closer look.

Flood insurance is not required for all properties; however, protecting your home with this type of insurance not only gives you peace of mind, but also the financial resources to help rebuild your home after a disaster. Talk to your local insurance agent for any assistance making this decision.

If your lender does require this type of insurance, then you will have to upkeep your flood insurance throughout the term of the loan when the following factors are present:

1. The community you reside in participates in NFIP
2. The property is determined by FEMA as located in an Special Flood Hazard Area (SFHA)
3. The institution makes, increases, extends, or renews any loan(s) secured by improved real estate that is fixed to a permanent foundation 

According to LPI, the mortgage lender must provide the borrower a notice stating that his or her flood insurance will lapse in 45 days. This gives the borrower adequate time to obtain new insurance before charging a fee and force placing the required protection coverage. Simply re-purchasing flood insurance is the best way to avoid higher fees and lender violations when your insurance lapses. 

Failure to pay will activate the Final Flood Rule, which:

1. Specifies that the lender may charge the borrower for LPI beginning on the date of lapsed insurance
2. Requires the lender to cancel the borrower’s previous LPI and refund any unearned and overlapping premiums within 30 days of receipt (if the borrower obtains a flood insurance policy that overlaps with the LPI policy)
3. Instructs the lender to accept a declarations page, including flood policy number, insurance company/agent, and contact number, as proof of insurance

The lender will also provide a reminder at least 30 days after the 45-day notice is issued.

Overall, to avoid the stressful and often costly process that occurs when flood insurance lapses, it’s important to check your policy each year, update as necessary, and ensure that premiums remain paid in full. For more information about what you should do if your flood insurance lapses, or to learn more about home financing, contact a mortgage specialist today.