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Ask the Experts; Home Buyers, Be Aware

When your borrowers are buying or renovating a home, they may want you to answer a variety of questions about flood insurance. Here are two examples: one basic and one that’s a little more complex. If you wonder about how to answer, you are not alone.

Do I Have a Right to Know?

Question: If I am planning to buy a house, is the seller obligated to inform me if the house is in a Federal Emergency Management Agency (FEMA) designated flood area? What if the seller doesn’t know?

Answer: The requirements that go with selling a home vary from state to state (and even community to community – a community may, theoretically, have stricter requirements than the state), but a real estate agent should know what is required. For instance, when I bought my home, a termite and roof inspection (and guarantee) were required but nothing about the flooding history.
In some areas, sellers do have deed requirements to include information about past flood damage, but this is rare. Remember, a seller may not know the home’s history before he bought it. You might be able to see evidence of prior flooding – such as flood lines on the brick foundation – but that’s not always evident.

Is My Renovation Considered Substantial Improvement?

Question: We bought a house on a cove on the Connecticut shoreline that is in a V-10 zone and therefore subject to flooding from a hurricane. I want to add a small addition to the existing dwelling. The town’s building official claims that this is a new construction (because it requires a foundation) even though it comes in under the 50 percent market value defined as substantial improvement. Is an addition to an existing dwelling considered new construction if the total cost is less than 50 percent of the market value?

Answer: The addition to your existing dwelling would be considered new construction. The fact that the cost to construct is less than 50 percent of the market value of the existing building means that your dwelling would not be considered substantially improved and there would be no change in the manner in which the policy is rated. However, please check with your building official. The addition must be built next to and in contact with the existing building and constructed so that the bottom of the lowest supporting member of the lowest floor is at or above the Base Flood Elevation (BFE). You’ll also have to provide an Elevation Certificate (EC) to verify that the addition has been built in accordance with your community’s floodplain management ordinances.

Tracking Changes

Remind your borrowers that any change in their status as owners can affect all forms of insurance, including flood. Borrowers are encouraged to check with their agents who can in turn refer to the Flood Insurance Manual for all pertinent information regarding their coverage.

Reprinted with the permission of Susan Bernstein, Editor of Watermark.