diff --git a/src/backend/tests/unit/interface/initialize/test_loading.py b/src/backend/tests/unit/interface/initialize/test_loading.py
index 283109f7b1..106632fa88 100644
--- a/src/backend/tests/unit/interface/initialize/test_loading.py
+++ b/src/backend/tests/unit/interface/initialize/test_loading.py
@@ -12,15 +12,17 @@ from lfx.interface.initialize.loading import (
 async def test_update_params_fallback_to_env_when_variable_not_found():
     """Test that when a variable is not found in database and fallback_to_env_vars is True.
 
-    It falls back to environment variables.
+    It falls back to environment variables. This specifically tests the fix for the bug
+    where 'variable not found.' error would always raise, even with fallback enabled.
     """
     # Set up environment variable
     os.environ["TEST_API_KEY"] = "test-secret-key-123"
 
     # Create mock custom component
     custom_component = MagicMock()
-    # Change this error message to avoid triggering re-raise
-    custom_component.get_variable = AsyncMock(side_effect=ValueError("Database connection failed"))
+    # Use "variable not found." error to specifically test the fix
+    # Previously this would always raise, even with fallback_to_env_vars=True
+    custom_component.get_variable = AsyncMock(side_effect=ValueError("TEST_API_KEY variable not found."))
 
     # Set up params with a field that should load from db
     params = {"api_key": "TEST_API_KEY"}
diff --git a/src/lfx/src/lfx/interface/initialize/loading.py b/src/lfx/src/lfx/interface/initialize/loading.py
index 229066a00f..7191788c16 100644
--- a/src/lfx/src/lfx/interface/initialize/loading.py
+++ b/src/lfx/src/lfx/interface/initialize/loading.py
@@ -271,7 +271,9 @@ async def update_params_with_load_from_db_fields(
                 try:
                     key = await custom_component.get_variable(name=params[field], field=field, session=session)
                 except ValueError as e:
-                    if any(reason in str(e) for reason in ["User id is not set", "variable not found."]):
+                    if "User id is not set" in str(e):
+                        raise
+                    if "variable not found." in str(e) and not fallback_to_env_vars:
                         raise
                     logger.debug(str(e))
                     key = None