Public Water Connection little known rule that can kill a closing!
Hopefully you have never been caught off-guard by this little known Public Water FHA rule. It can add a large unexpected cost to a purchase!
Did you know that if a property is using a well for it’s source of water and there is a public water connection “available” to the property, FHA requires that the public water connection be made to the home. If you are buying or selling real estate in the county, this can come up more than you would like to. Many properties may have a well installed forever but the county has run public water lines by the house. This makes public water “available” and required to be connected prior to closing. But there is a BUT! Let’s read the FHA rule here first…
FHA Rule About Connection to Public Water
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. Reference the FHA guideline is here
What is the Reasonable Cost Guideline for Public Water?
So did you catch that key phrase? When it is “feasible and available at a reasonable cost“. So I’m sure you want to know, what is reasonable? Well the accepted guideline to follow is if the cost to connect is under 3% of the fair market value of the home as determined by the FHA appraisal, it must be completed. On the contrary, if the cost to connect is over 3%, this is considered to Not Be Feasible. When this appears on an appraisal that a public water connection is available but not being used, then an estimate from a licensed plumber or similar must be obtained and provided to the appraiser. The appraiser adds this cost to the appraisal so it can be reviewed by underwriting. If the cost is over 3%, generally the requirement is waived but if it is under 3% it must be connected. Generally we have seen the buyer pay this but often an FHA buyer may not have the funds so then it falls on the seller if the purchase is going to close. The other option is to change mortgage programs to USDA or a Conventional loan for instance.
How to Prepare Up-Front for This Public Water Connection Rule
Sellers & Listing Agents:
- Get a written quote for public water connection from a licensed plumber
- Determine if it is greater than or less than 3% of the price
- Decide if the property should be connected to public water
- If no, have the quote available for buyers and buyers agents so this is known up-front
Buyers and Buyer’s Agents:
- Are you using FHA to purchase a home where this rule applies?
- Determine if properties have a potential public water connection
- Ask if the seller is going to connect to public water
- If the seller will not pay to connect, ask for a quote to see if you will be required to connect prior to closing
The important thing to remember on this rule is that 1) If you do your homework, you can prepare up-front for this and 2) Often there are alternative loan products that will not require and 3) We are the swiss army knife of mortgage lending and know the products available