NFIP rules allow for the issuance of an SFIP to cover
a building in the course of construction before it
is walled and roofed. These rules provide lenders
with an option to require flood insurance coverage
at the time that the development loan is made to
comply with the mandatory purchase requirement
outlined in the Flood Disaster Protection Act of
1973, as amended.

What does "option" mean. We have a commercial construction loan that is suppose to close tomorrow. We figured out today that it is in a flood zone. We gave disclosure today and are trying to get flood insurance in place. will we have a violation on the disclosure portion if we close tomorrow.

The construction option gives you the ability to close the loan without the policy in hand on initial construction. BUT you cannot advance funds for upward construction until you have the policy in hand. This means you would need to have a process in place to monitor the loan and prevent draws until you have a policy in place. You would be allowed to fund the purchase or the lot and the pouring of the footers, but that is it.

We ONLY allow this option on an exception basis, and I have to approve it. I only approve it when it is very apparent that the structure will be built outside the SFHA requiring insurance (ie only a teeny, tiny sliver of the lot is in the SFHA and the house is going to be built on the larger portion outside the SFHA). We still monitor the line, get inspections, and freeze draws after footers until a foundation survey has been obtained and compared to the flood maps. We also have a very strong process to monitor this and I don't approve very much (I've only approved 3 in the last 5 years). If the lot is 50/50 in or there is any doubt, it must have insurance before closing.

If you do not have a good process to prevent draws, do NOT invoke this option.

Good advise Dani. Let me put it this way. You can delay the purchase of flood insurance, but it creates problems:
1. You have to monitor draws more precisely.
2. You have to halt draws until insurance is in place when the foundation is poured.
3. There will be a 30 day delay in the purchase since it wasn't purchased to get the loan - which delays construction substantially.

Here's the FAQ addressing this:
…a lender may allow a borrower to defer the purchase of flood insurance until either a foundation slab has been poured and/or an elevation certificate has been issued, or if the building to be constructed will have its lowest floor below the Base Flood Elevation, when the building is walled and roofed.

…the lender must require the borrower to have flood insurance in place before the lender disburses funds to pay for building construction (except as necessary to pour the slab or perform preliminary site work, such as laying utilities, clearing brush, or the purchase and/or delivery of building materials).

…must have adequate internal controls in place at origination to ensure that the borrower obtains flood insurance no later than when the foundation slab has been poured and/or an elevation certificate has been issued. [Interagency FAQ #22]
[Interagency FAQ #22]