By procedure, do you run a flood determination on every loan secured by property, regardless of whether improved or unimproved? Insurance is only required if the property is improved and in a flood zone, so is there any argument for determining the flood zone on a land/lot lot?

Thanks in advance!

We don't pull determinations on land-only/lot loans.

A determination is not required on land/lot if there is no improvements on it.

The problem comes though if there is something built on the property post loan closing.

In my opinion, if the client is purchasing the real estate it is in the best interest of the bank to pull a determination up front and let the client know the property is in a flood zone. This may change the clients mind and they may decide they don't want to purchase the property. IF the bank does not pull a determination and the client builds on it technically the bank is suppose to pull a determination prior to completion of the construction (see reg for exact point in construction in which a determination must be pulled) and it is hard to time this so the bank is in compliance with the regulation. Then if the bank pulls a determination once they know about the building the bank is put in a difficult position of then requiring flood insurance and the client may be upset at the bank for not notifying them sooner. Long story short - I think it is beneficial regardless of regulation requirements to have a determination pulled sooner vs later.

The only issue with that is that flood maps change. So the borower could buy the property today, and it's not in an SFHA requiring flood insurance, but 5 years later they want to build a house, but the FIRM changed in year 4 and the property is now in a flood zone.

At our bank, we don't pull for lot loans. The requirement would be triggered when the bank has knowledge that the borrower built (or gets the construction loan with us) on the property. At the point the bank has knowledge that a covered structure has been built (or gets the construction loan with us), we would pull the determination and go from there.

The other issue with pulling the determination when not required is that your borrower is incurring an unnecessary expense.

Valid points, thank you both.

I don't know flood as well as you, so I've got a question born of ignorance.

Even if the customer built on the property subsequent to our loan for the lot, why would that trigger a pulling of a flood determination by us? Presumably we don't have the structure as collateral, right? If there was a lender for the construction costs it would be their responsibility, no?

You will have to look at your deed language. Our deeds include language that includes any existing or future improvements to the property. If your deed includes that (most loan doc systems include the boiler-plate language), then once the house is built, it's included in your collateral. The key with flood compliance is documenting when you have knowledge of the new structure.

If you want your land only loan to always and forever include the land only and not any future improvements, you will need to specifically exclude them in the deed language. Do this with caution, as if you ever need to foreclose, you won't be able to foreclose on a house that's been built on the lot and you'll need to get your attorney involved with that.

Our procedures mirror Dani's. Having said that, it's not uncommon for subsequent renewals with re-appraisals to indicate structures. Barns, silo's, shops, storage etc. (I'm purposely ignoring structures such as a house here). Even at that point, you will need to pull flood as you now have knowledge of the improvement, assuming it meets the qualifications of a 'structure'.

Thanks Dani!

We do a determination on any land secured loan. Then, if in a SFHA, we require the appraiser to document whether or not there are any structures. Borrowers (and loan officers) sometimes think that a structure that is going to be razed does not exist (and I don't trust them). I want a licensed professional to confirm and describe structures, if any.

You can still do a land only lien to eliminate the requirement for insurance if the structure will be torn down.

Al