FHA loan rules for One-Time Close construction loans include a set of requirements the finished property, which must meet both state/local building code and FHA loan minimum property standards.
Those FHA standards include a set of requirements for access, utilities, and water quality which must be met as a condition of loan approval. It’s surprising to some FHA loan applicants that certain features of a new construction home are A) regulated and/or B) allow things like septic tanks or wells.
But not all properties are the same, and some construction issues are present in some housing markets that aren’t a consideration elsewhere.
Well water is a great example. When a resident of a large metropolitan areas thinks of a new construction home, it’s likely that issues surrounding wells and well water quality would be on their minds-after all, who needs a well in a large city? But in rural areas, especially those in states where there are great expanses of land between homes, well water is a serious issue and is properly addressed in the FHA loan rules.
FHA Loan Water Supply/Utility Rules For One-Time Close Construction Loans
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.”
Additionally, the lender is required to insure that certain details of a home’s connection or relationship to local utilities (or related issues) are properly documented. “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 For Local Utilities
When it comes to the availability and usage of public utilities (as opposed to staying “off-grid” with wells and/or septic, 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. Exceptions or unique circumstances would be handled on a case-by-case basis.
For ANY FHA loan, One-Time Close 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.”
As you can see from the above, FHA will default to the jurisdiction of the local authority in matters of health standards for drinking water, acceptability of septic/sewage systems, etc. Borrowers with concerns in these areas will need to consult the local authority, not the FHA, for guidance.
All that said, FHA loan rules DO specify standards for the construction of wells-no lead piping is allowed and there is a minimum requirement for water flow. FHA loan rules state for new construction, “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.
FHA Loan Rules For Shared Wells
The lender is required to insure a shared well “is 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”.
We have done extensive research on FHA One-Time Close mortgages and spoke directly to the licensed lenders for most states. These are qualified mortgage loan officers who work for lenders that know the product well. Each company has supplied us the guidelines for their product. If you are interested in being contacted by one licensed lender in your area, please respond to the below questions to save time. All information is treated confidentially.
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Please note that the FHA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multifamily units (no duplexes, triplexes or fourplexes).
1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your credit score and/or the Co-borrower’s credit score, if known. 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veteran’s, the down payment is $0 up to the maximum VA lending limit for your county. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.