Why it’s more important than ever for lenders to focus on flood education.

By: Natascha Devries, VP, Flood, ServiceLink

Many homeowners don’t think about flood waters until they’re in a situation where it is too late. The unfortunate reality is that flood damage can be costly and timely. The Federal Emergency Management Agency (FEMA) estimates that one inch of water in a 2,500 square foot home can cause up to $23,000 in damage.

With millions of homes in the U.S. sitting in high-risk flood zones, it’s more important than ever for lenders to educate their borrowers on this topic. Research suggests that most homeowners do not know their property’s flood zone designation, their property’s likelihood of flooding, and assume that their homeowners’ insurance would cover any damages if that were to happen.

The question remains, why do so few property owners have a working knowledge of these concepts? In my experience, it could be the fact that most lenders are focused more on originating the loan and following regulatory and compliance laws - than taking their borrowers on a deep dive into the intricacies of this part of the transaction.

At ServiceLink, helping lenders understand a property’s flood status has been a hallmark of our business since its inception decades ago. While our proprietary products and services are always ready to bring clarity to a structure’s risk level, there are still many more misconceptions that need to be addressed.

Below are the top 5 most misunderstood terms in the flood services industry.

1. Flood Zone - A geographical area shown on a Flood Hazard Boundary Map or a Flood Insurance Rate Map that reflects the risk of flooding in the area.

Common misconception: A flood zone tells you whether flooding will or will not happen.

Reality: Flood zones reflect relative flood risk, not certainty. Many property owners believe being outside a Special Flood Hazard Area means they cannot flood, when significant flood losses occur outside mapped high-risk zones. Statistically, 20-25% of flood claims are outside of a Special Flood Hazard Area.

2. Federal Emergency Management Agency (FEMA) - The federal agency within the Department of Homeland Security that is tasked with responding to, planning for, recovering from and mitigating against man-made and natural disasters.  

Common misconception: FEMA will pay for everything after a flood.

Reality: FEMA assistance is intended to help people recover with essential needs after a federally declared disaster – not to replace comprehensive flood insurance. A National Flood Insurance Program (NFIP) flood policy does not automatically include contents coverage. Building and contents are separate coverages. Homeowners can purchase both, but many property owners discover after a flood that they only purchased building coverage, and their personal belongings are not insured.

3. Elevation Certificate - A certificate that verifies the elevation data of a structure on a given property relative to the ground level; must be issued by a professional surveyor.

Common misconception: Insurance requirements can be removed solely based on elevation information. If the Lowest Adjacent Grade (LAG) is above the Base Flood Elevation (BFE), insurance requirements can be removed.

Reality: If the Lowest Adjacent Grade (LAG) is above the Base Flood Elevation (BFE), one can apply for a Letter of Map Amendment, which when issued by FEMA will remove the insurance requirements.

4. 100-year Flood - A flood event having a 1% chance of being equaled or exceeded in any given year; also referred to as the 1% annual chance flood and the Base Flood.

Common misconception: It only happens once every 100 years.

Reality: A 100-year flood has a 1% chance of occurring in any given year. It can happen multiple years in a row – or even multiple times in the same year. FEMA now often refers to it as the 1% annual chance flood.

5. Water Damage vs. Flood Damage

Common misconception: All water entering a building is considered flood damage.

Reality: Insurance distinguishes between water originating from inside the structure (e.g., broken pipe) and floodwater coming from outside that inundates normally dry land. Coverage can differ dramatically based on the source. FEMA's flood definition specifically relates to inundation from overflowing waters, runoff or mudflow events.

As lenders, who borrowers lean on for guidance throughout the homebuying process, it is important to understand these key terms to help your customers not only remain compliant but make the best decisions for their properties. With a trusted vendor like ServiceLink to provide cutting-edge technologies and guidance at every step, together we can make strides in the areas of borrower education and industry awareness.

‍