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Flood Insurance Questions & Answers

What does Fannie Mae mean by replacement value?

“Replacement value” refers to the cost of rebuilding the improvements to the property that are the same size and have the same amenities as the original structure. Fannie Mae requires that flood insurance for a first mortgage be the lesser of

(i) the amount required to compensate for any damage or loss on a replacement cost basis (or UPB if replacement cost coverage is not available); or

(ii) the maximum available under the National Flood Insurance Program (currently $250,000)

Because the flood insurance dwelling policy will pay 100% of a loss on the basis of replacement cost only when the amount of insurance purchased is at least 80 percent of the replacement cost of the building, a lender must obtain coverage for at least 80% of replacement cost (the minimum amount required) in order to meeting Fannie Mae’s standards described in (i) above.

For example, for a property where the property improvements are valued at $100,000, the amount of coverage required would be at least $80,000. Coverage in a lesser amount would not meet the standard for replacement cost because it would be subject to the co-insurance penalty.

If a loan is made on a property that is located in a community that does not have FEMA flood maps, is it necessary to obtain a flood determination for a loan to be delivered to Fannie Mae?

Lenders must determine whether any of the improvements for a security property are located in a Special Flood Hazard Area by using a Standard Flood Hazard Determination (FEMA Form 81-93). The Standard Flood Hazard Determination Form should indicate whether the property is located in an unmapped community. When the area is not mapped, there is no designation Special Flood Hazard Area and the federal mandatory purchase of flood insurance requirement does not apply and consequently, Fannie Mae does not require flood insurance.