FHA loan standards include a set of requirements for utilities, and water quality which must be met as a condition of loan approval. Some properties aren’t served by a local water utility system, and instead rely on well water. They must meet FHA loan standards addressing these areas.

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FHA One-Time Close Construction Loan Rules for Water Utilities

February 26, 2019

An FHA One-Time Close construction loan has appraisal requirements the same as any other type of home loan transaction. FHA loan rules, state/local building code, and applicable local health authority requirements will all play a part in determining whether the finished construction project is acceptable.

FHA loan standards include a set of requirements for utilities, and water quality which must be met as a condition of loan approval. Some properties aren’t served by a local water utility system, and instead rely on well water. Properties that use wells, and properties with septic tank systems must meet FHA loan standards addressing these areas. What are those standards?

FHA Loan Water Supply/Utility Rules

In general, FHA loan rules require all properties to be "free of all known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants, the Property’s ability to serve as collateral, and the structural soundness of the improvements."
The FHA does not spell out all the health and safety rules which may apply-the local health authority will be responsible for establishing those standards which must be heeded as a condition of loan approval.

The lender is also required to properly document the nature of a home's relationship to local utilities. From HUD 4000.1, the FHA loan handbook:

"If utilities are not located on Easements that have been permanently dedicated to the local government or appropriate public utility body, the Mortgagee must confirm that this information is recorded on the deed record."

FHA loan rules in HUD 4000.1 have standards for the construction of wells. For example, lead piping is not permitted and there is a minimum requirement for water flow. Where new construction is concerned, "Wells must deliver water flow of five gallons per minute over at least a four-hour period". In certain cases shared wells may be allowed, but they must also meet a set of requirements including the following guidelines for water delivery.

Shared Wells

HUD 4000.1 requires a shared well to be capable "of providing a continuous supply of water to involved Dwelling Units so that each existing Property simultaneously will be assured of at least three gallons per minute (five gallons per minute for Proposed Construction) over a continuous four-hour period."

This section adds that the well may have a "lesser yield" in cases where "pressurized storage is provided in an amount that will make 720 gallons of water available to each connected existing dwelling during a continuous four-hour period or 1,200 gallons of water available to each proposed dwelling during a continuous four-hour period. The shared well system yield must be demonstrated by a certified pumping test or other means acceptable to all agreeing parties".

FHA Loan Rules For Local Utilities

When it comes to the availability and usage of public utilities, FHA loan rules in HUD 4000.1 state that the lender must, "confirm that a connection is made to a public or Community Water System whenever feasible and available at a reasonable cost. If connection costs to the public or community system are not reasonable, the existing onsite systems are acceptable, provided they are functioning properly and meet the requirements of the local health department."

The "whenever feasible" requirement is a rule of thumb that can be applied to most utility concerns in this area. For any FHA loan (including FHA One-Time Close construction loans or other types of mortgages) there are no specific rules found in HUD 4000.1 about the quality of water or other utilities except as provided for in that quote above and this guidance found on page 167:

"When an Individual Water Supply System is present, the Mortgagee must ensure that the water quality meets the requirements of the health authority with jurisdiction."

And when there are no local or state standards? FHA rules anticipate this situation, instructing the lender:

"If there are no local (or state) water quality standards, then water quality must meet the standards set by the EPA, as presented in the National Primary Drinking Water regulations in 40 CFR §§ 141 and 142."

Construction Loans at OneTimeClose.com FHA, VA, and USDA: One-Time Close Loans

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We have done extensive research on the FHA (Federal Housing Administration), the VA (Department of Veterans Affairs) and the USDA (United States Department of Agriculture) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
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Please note that investor guidelines for the FHA, VA, and USDA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs:  Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
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