Question: We recently applied for a mortgage and the good faith estimate included two charges that I’ve never seen before: $80 for tax service fee and $25 for flood certification. I assume that the flood certification is to determine whether we are in a flood zone, but what is the tax service fee for? And if we are in a flood zone, will we be required to buy flood insurance? How much does flood insurance cost? — V.W., Everett
Answer: The two fees you have mentioned often confuse mortgage borrowers, especially if they have never applied for a loan before.
The tax service fee is paid to an independent company that tracks property tax records for mortgage lenders. In order to protect their security interest, lenders want to make sure that the property tax bills are paid each year for the properties on which they hold loans.
Property taxes have first lien priority, and if the taxes are not paid, the home is sold at a foreclosure auction and the lender’s entire collateral for the loan is wiped out.
Since lenders don’t have time to check the property tax records for every loan themselves, they hire a tax service to do the work for them, and that cost is passed on to you at closing.
Flood certification is another confusing closing cost.
Certification companies charge a fee to make sure the property being financed is not located in a designated flood zone. Every homeowner getting a mortgage these days must go through this process, whether the home is located down in a valley or on the top of a hill. I know that sounds silly, but a 1994 federal law imposes fines on mortgage lenders who fail to inform homebuyers that the property they are buying is located in a flood zone. Lenders can also be fined for failing to require homebuyers in flood zones to purchase flood insurance, and they must notify the loan servicing companies of the flood insurance requirement whenever the mortgage is sold or transferred. So lenders are very careful to make sure they identify all properties that may be in a flood zone.
Flood zone maps are sometimes updated, with the flood zones changed. At my mortgage company, we’ve recently had a couple of clients who were forced to get flood insurance on their property because they are now inside a designated flood zone, but were not in the zone the last time the property got a mortgage loan.
There has been a dramatic increase in the amount of flood insurance coverage in this state over the past 30 years. In 1975, only about 5 percent of the buildings in designated flood zones carried flood insurance. Today, more than 85 percent of the homes in flood hazard areas have flood insurance. Eventually, all of the homes within flood zones will have flood insurance.
But even if your property is located outside a designated flood zone, you can’t automatically assume it’s safe. About 30 percent of the flood insurance claims in Washington come from properties located outside of the designated flood plains. Drainage problems and storm water runoff can cause flood damage even to hillside homes.
Flood insurance is available to any homeowner, regardless of whether you live in a flood zone. The “A Zone” flood insurance rates for homes within the 100-year flood plains are much higher than the rates for homes located in less hazardous “B” and “C” zones. Unlike standard homeowner’s insurance, you don’t have to shop from one insurance company to another because there is only one flood insurance plan: the National Flood Insurance Program. You don’t have to contact a federal agency — you simply purchase the flood insurance policy through your local insurance agent.
Some homeowners think they don’t need to buy flood insurance because the federal government will be there with a check if disaster strikes. While the government does offer low-interest loans to flood victims in disaster areas, it’s important to remember that like any other kind of loan, that money has to be paid back. And if a homeowner is foolish enough not to buy flood insurance after receiving a government disaster loan, they are ineligible for further government assistance if they are flooded out of their home again.
The idea behind the National Flood Insurance Program is to make sure that the people living in the flood zones are the ones paying the price when nature strikes, rather than spreading the damage costs across the general public. As mortgage lenders force the property owners in potential flood areas to purchase flood insurance, those of us living on dry land can be assured that we won’t have to bail out homeowners who are literally willing to bet the ranch that the creek won’t rise.
Mail real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail economy@heraldnet.com.
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