September 21, 2017

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FHA Loan Appraisal Questions: Well Water Guidelines

A reader asked us an FHA loan appraisal question this week about a recent post we did on water quality issues. “We have been requiring a safe water test to verify the water standards are meet per the guidelines but we now have an Loan Officer arguing that it is not required unless the appraiser notes an issue. Is a water test really not required have I been reading the guidelines wrong since 2015?”

The “we” in this case would seem to be a participating FHA lender. Is the loan officer mentioned in the question correct? We turned to the relevant passages in HUD 4000.1 to reaffirm what the FHA loan rule book says about water quality.

“The Mortgagee 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 last line in this quote is key-the local health department’s standards would be the deciding factor. Does the local health authority require a water test? If not, how does the lender determine the quality of the water in accordance with what’s quoted above?

HUD 4000.1 also adds that there are more requirements for wells and other non-utility water sources.

“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. 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.”

This blog is not written by an FHA representative, nor is it affiliated with the FHA in any way, so the following comments are our opinions alone and do not represent FHA official policy. However, reading the passage above does seem to imply that there is a burden of proof on the lender to make sure the water supply meets certain standards.

That interpretation would seem to indicate that the loan officer’s belief (mentioned in the reader’s question above) is not true. For further clarification of FHA loan appraisal rules in HUD 4000.1 on this issue, it may be best to call the FHA directly (1-800 CALL FHA) and speak to a representative of the agency who may be able to assist further.

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