A buyer seeks FHA insurance for a mortgage on a dwelling located in a FEMA-designated Special Flood Hazard Area. More than one year has passed since FEMA notified the community’s chief executive of the designation. The community still does not participate in the NFIP. How does this affect the proposed FHA financing?
Correct Answer
C) FHA insurance is unavailable for this property under the nonparticipating-community restriction
C. The nonparticipation restriction prevents FHA insurance on these facts. Section 203.16a(a)(2) requires community participation and NFIP availability for the covered improvements. The revised facts place the dwelling itself in the designated area and establish that the notification period has elapsed. Scope and exceptions: Do not infer that every mortgage in a nonparticipating community is prohibited. This is FHA insurance for covered improvements. Qualifying private flood insurance may satisfy coverage requirements in eligible circumstances, but does not erase the community-participation condition. Source: Section 203.16a(a)(2)–(3), (b)–(c) — https://www.ecfr.gov/current/title-24/section-203.16a
Why This Is the Correct Answer
C. The nonparticipation restriction prevents FHA insurance on these facts. Section 203.16a(a)(2) requires community participation and NFIP availability for the covered improvements. The revised facts place the dwelling itself in the designated area and establish that the notification period has elapsed. Scope and exceptions: Do not infer that every mortgage in a nonparticipating community is prohibited. This is FHA insurance for covered improvements. Qualifying private flood insurance may satisfy coverage requirements in eligible circumstances, but does not erase the community-participation condition.
Why the Other Options Are Wrong
Option A: The community's nonparticipation removes the property from the Special Flood Hazard Area
Nonparticipation does not change FEMA’s hazard designation.
Option B: FHA insurance is available if the borrower signs a waiver of federal disaster assistance
A borrower waiver does not substitute for the requirement.
Option D: The lender may obtain FHA insurance by accepting the flood risk in its underwriting
A lender’s willingness to accept risk does not override FHA eligibility.
Exam Tip
Separate flood-zone location, community participation and the insurance policy itself.
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