At times, home buyers are presented with the perfect prospect: an optimal design, solid construction, a spacious yard, good schools and a safe, friendly neighborhood. Better still, the price is right. The bid is accepted, a mortgage loan is approved and a title search is run. Only then do the buyers find out that the property is in a flood zone. While this fact may not necessarily kill the deal, it does make owning the house a more expensive proposition. How do banks know which properties lie in flood zones? How does that knowledge cost a buyer money, sometimes much money?

How Are Flood Zones Determined?

The fact is that a home might sit outside a flood zone for decades...until it does not. These areas are identified by the U.S. Federal Emergency Management Agency (FEMA). This agency defines Special Flood Hazard Areas (SFHA) as those that will fall subject to flooding that stands a one percent chance of repeating or growing worse in any given year. This classification is sometimes called Base flood or 100-year flood. Areas still susceptible to deluge--but less so--have likelihood ranging from .2 percent to 1 percent. The threshold of .2 percent defines a 500-year floodplain. Those tracts with little to no chance of flooding (less than .2%) are, unlike the 100-year designation, un-shaded on FEMA's Flood Insurance Rate Map (FIRM).

As a very general rule, all zones that contain "A" in the classification are flood-prone areas. Those with "B," "C" or "X" are often not but could require further research. FEMA partners with private, state and local agencies to survey tracts and parcels when flood events suggest the designations should be revised. The resulting flood maps are what title companies and banks consult to decide whether flood insurance should be a condition of the sale and the mortgage. If the decision is that the property is in an SFHA, this puts the onus for the next step on the home buyer.

What Do Buyers Do When Buying a Home in a Flood Zone?

In fact, the seller might be more nervous about a positive flood zone determination. The expense that it adds to a new owner's monthly payment can become cost-prohibitive...or price them out of home financing altogether. Most everyone who purchases a house with lent money has to prove they can assume the monthly payments comfortably. That monthly installment includes loan principal, interest, property taxes and home insurance often held in escrow, together known by the acronym PITI. Should flood insurance escrows be added to the PITI payment, the mortgage may not debt service to the lender's satisfaction. This means that too much of the borrowers' income is consumed by debt.

When buying a home, new purchasers do well to calculate a flood insurance premium into their monthly expenses. The national flood insurance program generally charges a $700 annual premium which can differ according to state and flood history. Important for buyers to remember is that a full year's premium will be due at closing in addition to two to three months of escrow as a cushion--this could apply to home insurance too. Before entering into the invasive process of credit checks, asset discovery, appraisals and employment verification, potential homeowners should sharpen their pencils and learn just how much PITI will be with flood insurance thrown into the mix.

See if your property of interest is in a flood zone at