March 13, 2017
What are the FHA loan guidelines for septic tank issues? A reader asked us a question in this area in the comments section recently: “I am in contract to buy a home with a FHA 203 rehab loan. Today I had building and septic inspections and I found the septic was actually located on the neighbors property. The neighbor doesnt care and is very willing to work with me on it. Does this disqualify the loan?”
There are several factors at work for FHA loan approval, not just FHA loan minimum standards. State law, building code, health department requirements and other regulations may affect whether corrections are required as a condition of loan approval. So it’s very important to understand that FHA loan rules may be silent in areas where local requirements are not.
FHA loan rules don’t seem to address the specific circumstance mentioned in the reader question.
However, HUD 4000.1 does state that FHA rehab loans can be used to upgrade septic and related features of the home, so the borrower’s options are a bit more flexible than if the home was simply being purchased, not purchased and rehabbed with FHA loan funds.
HUD 4000.1 states that the following are permitted with FHA rehab loans:
-eliminating health and safety hazards that would violate HUDs Minimum Property Requirements (MPR);
-installing or repairing wells and/or septic systems;
-connecting to public water and sewage systems;
That is NOT a complete list, just a list of the things that could be repaired or improved that relate to the reader question. There are two types of FHA rehab loans not associated with recovering from a natural disaster-borrowers can choose from a smaller FHA rehab loan for less ambitious projects, but a larger FHA 203(k) rehab loan is also available with a $5,000 minimum for projects that require more extensive work.
FHA rehab loans are excellent for purchasing fixer-upper properties, but also for use on a home the borrower already owns. The FHA has a 203(k) rehab loan available as a refinance mortgage, so that is an offer borrowers who already own property should consider if they want to do repair work as part of a home loan refinance. Some types of improvements are not eligible for rehab loan funds, including pool houses, tree surgery (unless intended to remove a danger), satellite dishes, tennis courts, barbecue pits, etc.
Speak to your loan officer about your FHA 203(k) rehab loan options. These loans can be much different than FHA cash-out refinance mortgages, but they will still require a credit check and appraisal.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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