While the addition of a security interest in property located in a flood zone would make the loan a “designated loan” for purposes of the flood regulations, we do not believe that you will have to obtain flood insurance until you “make, increase, extend, or renew” the loan. 12 CFR 208.25(b)(4)208.25(c)(1).   

When you do increase, extend, or renew the note, we believe you would be required to obtain the flood insurance before closing. As stated in FEMA’s Mandatory Purchase of Flood Insurance Guidelines (Section A. Introduction, page 5): 

d. Insurance Required at Loan Closing

 A designated loan must have flood insurance as a condition of closing. If a borrower will not voluntarily obtain coverage, the lender must deny the loan. A lender cannot accept a borrower’s assurance that he or she will obtain coverage in the future or grant the lender indemnity while he or she seeks coverage. Closing a designated loan without coverage in place constitutes a violation of the regulation.

 Note that if you are taking a second or junior lien on the home, you must “require that additional flood insurance coverage be added to the flood insurance policy in the amount of the lesser of either the combined total outstanding principal balance of the first and second loan, the maximum amount available under the Act (currently $250,000 for a residential building and $500,000 for a nonresidential building), or the insurable value of the building or mobile home.” Interagency Questions and Answers Regarding Flood Insurance, Question 36, 74 Fed. Reg. 35914, 35940 (July 21, 2009).