Flood Insurance
Question: We are making a loan on land that has an old house on it that the borrower plans to tear down the day after closing. The house is in a high risk flood hazard zone. Since the borrower doesn't plan to keep the improvements, do we have to purchase flood insurance?
Answer: Yes. There is no exception built in for plans to destroy the improvement. In this situation, you need to require the borrower to obtain flood insurance and maintain that insurance until the improvement (such as it is) is torn down or otherwise destroyed - except by flood, of course.
In your question, you don't indicate what the borrower plans to do with the property. Often, purchases such as this are actually for the purpose of future construction. If that is the borrower's long-term plan, both lender and borrower should understand the flood hazards related to the property. Even if your loan is only for lot purchase, you do the customer a service by notifying them of the hazards that come with their purchase. It also helps the customer to anticipate future requirements if the customer builds a new structure.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 4, 5/04>/span>
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