I am confused on how to analyze coverage for existing mortgages in flood zones.

The reg states that "the amount of flood insurance required must be at least equal to the outstanding principal balance of the loan or the max amount - whichever is less." Then, it also says, "Flood insurance is limited to the overall value of the property."

So...which is it? The loan balance or value of the property?

This is for loans that are atleast one year old and I am trying to determine if coverage is appropriate today - thanks!

Flood insurance must be maintained in the amount of the lesser of:

1. The loan balance
2. The value of the improvements
3. The maximum amount available per NFIP

If you have a loan on a residential structure with an appraised value of $300,000 and the site value is $75,000, and your loan balance is $200,000, you would maintain insurance in the amount of $200,000. The value of the improvements is $225,000, the maximum amount from the NFIP is $250,000 and your loan balance is $200,000.

Does this make any sense?

yes it does - thank you.

And if any of these are subordinate liens, you have to make sure you have enough coverage to cover both the first lien holder and your subordinate lien if their total balances are the lesser amount.

Follow-up, using a $300,000 loan:

If you have two residential properties, with improvements valued at $270,000 and $260,000 respectively, do you have to have two $250M policies, or can you allocate between the two?

If both are in a special flood hazard area I believe you would need $300,000 total.

I'm sure someone will pipe up if I'm incorrect.

If I understand both these properties secures the $300,000 loan.

Value of improvements is $530,000 therefore the o/s balance is the lesser. You need $300,000 in flood insurance coverage and you can allocate as you wish between the two properties, however each property must have it's own NFIP policy.

Can you reference a source on the allocation question. I've had "discussions" with regulators where they have required full improvement value of EACH property under the theory that each policy must be as if it stood alone.

Have the regulators provide their cite. The Flood Law requires coverage in the lesser amount of:

1. The value of the property less the land value;
2. The outstanding principal balance of the loan(s);or
3. The maximum available under the NFIP.

In your scenario the loan balance of $300,000 is the lesser and is all you are required to obtain to be compliant. However, the Flood Law does require that each structure located within a SFHA securing a covered loan be insured by it's own NFIP policy. Therefore you would need two NFIP policies but they only need to total $300,000.

There are several free Banker Tools that may interest you pertaining to flood and the NFIP.