Which type of insurance might a lender require for properties located in flood-prone areas?

In flood-prone areas, lenders typically require flood insurance to protect the property from potential flood damage. Flood insurance is specifically designed to cover losses due to flooding, which is not included in standard homeowner’s insurance policies. Since flooding poses a unique risk that could cause significant financial loss and structural damage to properties, especially in designated flood zones, lenders mandate this type of coverage to ensure that their investment is adequately safeguarded.

This requirement aligns with federal regulations, especially in areas that participate in the National Flood Insurance Program (NFIP). Having flood insurance in place not only protects the borrower and property owner but also ensures that the lender has recourse in the event of flood-related damages, thus minimizing their financial risk.