Mortgage Q. & A.

Q: I found out that I have to buy flood insurance before I can get a mortgage loan. What exactly is flood insurance?

A: Flood insurance reimburses property owners who incur losses when their real property and personal property suffer serious water damage. There are a number of reasons that a property might suffer from water damage other than from massive flooding along rivers that sometimes occurs in the spring.

Water damage might happen when normally dry land becomes soaked by large amounts of water. This could occur from accumulation of runoff surface water, from the overflow of inland or tidal waters, from erosion caused by heavy runoff water, abnormally heavy rains or the melting of heavy snowfalls.

Since standard homeowners/hazard insurance does not cover flood damage, flood insurance provides additional protection for your investment, which is also the lender's collateral. That is why the lender requires borrowers to purchase homeowner's insurance (fire or hazard insurance, as it is sometimes called).

Q: When is flood insurance required?

A: The National Flood Insurance Program was created when Congress passed the Flood Disaster Protection Act in 1968. This program makes flood insurance available through a joint program sponsored by private insurance companies and the federal government. This act was later amended to require that mortgage loans made by a federally regulated lender, government-backed home loans, i.e., loans backed by the Federal Housing Administration or Department of Veterans Affairs have flood insurance protection if the property resides in a designated flood plain area. This is required since homes located in these areas have a higher risk of suffering flood damage. Homebuyers are encouraged to consider the benefits of flood insurance, which can be purchased through many insurance agents. And unlike other insurance policies that can be activated immediately, most agents require that your policy has been in effect for 30 days before you can make a claim.

Q. Do you need private mortgage insurance with an Federal Housing Authority mortgage?

A. If you don't put 20 percent down on your FHA purchase you will need mortgage insurance, but it's not called PMI, or private mortgage insurance. PMI refers to mortgage insurance on conventional loans. Mortgage insurance on an FHA loan is just called mortgage insurance and it differs from PMI in a couple of ways.

The FHA charges an up-front insurance premium of 1.75 percent of your mortgage amount on any loan. While the premium can be added to your loan amount, it's still an extra charge that you don't have to pay when getting a traditional loan.

But private mortgage insurance for conventional loans will run you $50 to $100 per month, based on the 2008 median-priced home of $198,600. Mortgage insurance on FHA loans is based on your down payment. If it's less than 5 percent on a 30-year fixed-rate mortgage, insurance will run you 0.55 percent annually. A down payment of 5 percent or more will reduce your annual cost to 0.5 percent, which is usually broken into 12 monthly payments added into your mortgage payment.