© HUD Single Family Housing Policy Handbook 4000.1
The Mortgagee must evaluate the appraisal and any supporting documentation to determine if the Property complies with HUD’s Property Acceptability Criteria. Existing and New Construction Properties must comply with Application of Minimum Property Requirements and Minimum Property Standards by Construction Status.
Included in this section are:
i. Defective Conditions
ii. Minimum Property Requirements and Minimum Property Standards
iii. Minimum Required Repairs
iv. Leased Equipment
v. Quality of Appraisal
vi. Chain of Title
vii. Opinion of Market Value
viii. Reconsideration of Value
i. Defective Conditions
The Mortgagee must evaluate the appraisal in accordance with Defective Conditions to determine if the Property is eligible for an FHA-insured Mortgage. If defective conditions exist and correction is not feasible, the Mortgagee must reject the Property.
ii. Minimum Property Requirements and Minimum Property Standards
As the on-site representative for the Mortgagee, the Appraiser provides preliminary verification that a Property meets the Property Acceptability Criteria, which includes HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).
Minimum Property Requirements refer to general requirements that all homes insured by FHA be safe, sound, and secure.
Minimum Property Standards refer to regulatory requirements relating to the safety, soundness and security of New Construction.
When examination of a Property reveals noncompliance with the Property Acceptability Criteria, the Appraiser must note all repairs necessary to make the Property comply with HUD’s Property Acceptability Criteria, together with the estimated cost to cure. If the Appraiser cannot determine that a Property meets HUD’s MPR or MPS, the Mortgagee may obtain an inspection from a qualified Entity to make the determination. Mortgagees must use professional judgment in determining when inspections are necessary to determine that a property meets MPR or MPS. Mortgagees must also use professional judgment in determining when a Property condition poses a threat to the health and safety of the occupant and/or jeopardizes the soundness and structural integrity of the Property, such that additional inspections and/or repairs are necessary.
The Mortgagee must confirm that the Property complies with the following eligibility criteria. If the Mortgage is to be insured under the 203(k) program, the Mortgagee must confirm that the Property will comply with the following eligibility criteria upon completion of repairs and improvements.
(A) Encroachment The Mortgagee must ensure the subject’s dwelling, garage, or other improvements do not encroach onto an adjacent Property, right-of-way, utility Easement, or building restriction line. The Mortgagee must also ensure a neighboring dwelling, garage, or other improvements do not encroach onto the subject Property. Encroachment by the subject or adjacent Property fences is acceptable provided such Encroachment does not affect the marketability of the subject Property.
(B) Overhead Electric Power The Mortgagee must confirm that any Overhead Electric Power Transmission Lines do not pass directly over any dwelling, Structure or related property improvement, including pools. The power line must be relocated for a Property to be eligible for FHA-insured financing.The residential service drop line may not pass directly over any pool, spa or water feature.If the dwelling or related property improvements are located within the Easement area, the Mortgagee must obtain a certification from the appropriate utility company or local regulatory agency stating that the relationship between the improvements and Local Distribution Lines conforms to local standards and is safe.
(C) Access to Property The Mortgagee must confirm that the Property is provided with a safe pedestrian access and Adequate Vehicular Access from a public or private street. Streets must either be dedicated to public use and maintenance, or retained as private streets protected by permanent recorded Easements.Private streets, including shared driveways, must be protected by permanent recorded Easements, ownership interest, or be owned and maintained by an HOA. Shared driveways do not require a joint maintenance agreement.
(D) Onsite Hazards and Nuisances The Mortgagee must require corrective work to mitigate potential adverse effects from any onsite hazards or nuisances reported by the Appraiser.
(E) Abandoned Gas and Oil Well If the Property contains any abandoned gas or oil wells, the Mortgagee must obtain a letter from the local jurisdiction or appropriate state agency stating that the subject well was permanently abandoned in a safe manner.If the Property contains any abandoned petroleum product wells, the Mortgagee must ensure that a qualified petroleum engineer has inspected the Property and assessed the risk, and that the appropriate state authorities have concurred on clearance recommendations.
(F) Requirements for Living Unit The Mortgagee must confirm that each living unit contains:
- a continuing and sufficient supply of safe and potable water under adequate pressure and of appropriate quality for all household uses;
- sanitary facilities and a safe method of sewage disposal. Every living unit must have at least one bathroom, which must include, at a minimum, a water closet, lavatory, and a bathtub or shower;
- adequate space for healthful and comfortable living conditions;
- heating adequate for healthful and comfortable living conditions;
- domestic hot water; and
- electricity adequate for lighting, cooking and for mechanical equipment used in the living unit.
The Mortgagee must ensure that appliances that are to remain and that contribute to the market value opinion are operational.
FHA does not have a minimum size requirement for one- to four-family dwellings and condominium units. For Manufactured Housing requirements, see the Manufactured Housing section.
(G) Swimming Pools The Mortgagee must confirm that any swimming pools comply with all local ordinances.
(H) Structural Conditions The Mortgagee must confirm that the Structure of the Property will be serviceable for the life of the Mortgage.The Mortgagee must confirm that all foundations will be serviceable for the life of the Mortgage and adequate to withstand all normal loads imposed.
(I) Economic Life/Section 223(e)The Mortgagee must confirm that the term of the Mortgage is less than or equal to the remaining economic life of the Property.If the Property is located in an older, declining urban area and the remaining economic life produces an unreasonably short mortgage term by reason of its location, the Property may be acceptable under Section 223(e), provided:
- the area is reasonably able to support adequate housing and living conditions for families of lower income levels;
- the location features adversely affecting the desirability and usefulness of the Property do not endanger the health and safety of its occupants;
- the Property is marketable to the typical occupant of the area;
- the physical life of the Property is greater than or equal to the term of the Mortgage; and
- the Mortgage represents an overall acceptable risk as determined by the Jurisdictional HOC.
All Mortgages to be insured under Section 223(e) must be submitted to the Jurisdictional HOC for prior approval.
(J) Environmental The Mortgagee must confirm that the Property is 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.
(K) Lead-Based Paint The Mortgagee must confirm that the Property is free of lead paint hazards.
(L) Methamphetamine Contamination If the Mortgagee or the Appraiser identifies a Property as contaminated by the presence of methamphetamine (meth), either by its manufacture or by consumption, the Property is ineligible due to this environmental hazard until the Property is certified safe for habitation.
(M) Repair Requirements The Mortgagee must determine which repairs must be made for an existing Property to be eligible for FHA-insured financing.
(N) Utility Services 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.
(O) Water Supply Systems
(1) Public Water Supply System 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.
(2) Individual Water Supply Systems (Wells)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.Soil poisoning is an unacceptable method for treating termites unless the Mortgagee obtains satisfactory assurance that the treatment will not endanger the quality of the water supply.Requirements for the location of wells for FHA-insured Properties are located in 24 CFR § 200.926d (f) (3).The following tables provide the minimum distance required between wells and sources of pollution for Existing Construction:
Individual Water Supply System for Minimum Property Requirements for Existing Construction* | |
1 | Property line/10 feet |
2 | Septic tank/50 feet |
3 | Drain field/100 feet |
4 | Septic tank drain field reduced to 75 feet if allowed by local authority |
5 | If the subject Property line is adjacent to residential Property then local well distance requirements prevail. If the subject Property is adjacent to non-residential Property or roadway, there needs to be a separation distance of at least 10 feet from the property line. |
* distance requirements of local authority prevail if greater than stated above | |
The following provides the minimum requirements for water wells:
Water Wells Minimum Property Standards for New Construction | |
1 | Lead-free piping |
2 | If no local chemical and bacteriological water standards, state standards apply |
3 | Connection of public water whenever feasible |
4 | Wells must deliver water flow of five gallons per minute over at least a four-hour period |
Water Wells Minimum Property Requirements for Existing Construction | |
1 | Existing wells must deliver water flow of three to five gallons per minute |
2 | No exposure to environmental contamination |
3 | Continuing supply of safe and potable water |
4 | Domestic hot water |
5 | Water quality must meet requirements of local jurisdiction or the EPA if no local standard |
(3) Shared Wells The Mortgagee must confirm that a Shared Well:
- serves existing Properties that cannot feasibly be connected to an acceptable public or Community Water supply System;
- 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. (The well itself may have a lesser yield if 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.);
- provides safe and potable water. An inspection is required under the same circumstances as an individual well. This may be evidenced by a letter from the health authority having jurisdiction or, in the absence of local health department standards, by a certified water quality analysis demonstrating that the well water complies with the EPA’s National Interim Primary Drinking Water Regulations;
- has a valve on each dwelling service line as it leaves the well so that water may be shut off to each served dwelling without interrupting service to the other Properties; and
- serves no more than four living units or Properties.
For both proposed and existing Properties, the Mortgagee must ensure that the shared well agreement complies with the guidance provided in the following table.
Item | Provisions that must be reflected in any acceptable shared well agreement include the following: |
1 | Require that the agreement is binding upon signatory parties and their successors in title, recorded in local deed records when executed and recorded, and reflects joiner by any Mortgagee holding a Mortgage on any Property connected to the Shared Well. |
2 | Permit well water sampling and testing by the local authority at the request of any party at any time. |
3 | Require that corrective measures be implemented if testing reveals a significant water quality deficiency, but only with the consent of a majority of all parties. |
4 | Ensure continuity of water service to “supplied” parties if the “supplying” party has no further need for the shared well system. (“Supplied” parties normally should assume all costs for their continuing water supply.) |
5 | Prohibit well water usage by any party for other than bona fide domestic purposes. |
6 | Prohibit connection of any additional living unit to the shared well system without: · the consent of all parties; · the appropriate amendment of the agreement; and · compliance with item 3. |
7 | Prohibit any party from locating or relocating any element of an individual sewage disposal system within 75 feet (100 feet for Proposed Construction) of the Shared Well. |
8 | Establish Easements for all elements of the system, ensuring access and necessary working space for system operation, maintenance, improvement, inspection and testing. |
9 | Specify that no party may install landscaping or improvements that will impair use of the Easements. |
10 | Specify that any removal and replacement of preexisting site improvements, necessary for system operation, maintenance, replacement, improvement, inspection or testing, will be at the cost of their owner, except for costs to remove and replace common boundary fencing or walls, which must be shared equally between or among parties. |
11 | Establish the right of any party to act to correct an emergency in the absence of the other parties onsite. An emergency must be defined as failure of any shared portion of the system to deliver water upon demand. |
12 | Permit an agreement amendment to ensure equitable readjustment of shared costs when there may be significant changes in well pump energy rates or the occupancy or use of an involved Property. |
13 | Require the consent of a majority of all parties upon cost sharing, except in emergencies, before actions are taken for system maintenance, replacement or improvement. |
14 | Require that any necessary replacement or improvement of a system element(s) will at least restore original system performance. |
15 | Specify required cost sharing for: · the energy supply for the well pump; · system maintenance, including repairs, testing, inspection and disinfection; · system component replacement due to wear, obsolescence, incrustation or corrosion; and · system improvement to increase the service life of a material or component to restore well yield or to provide necessary system protection. |
16 | Specify that no party is responsible for unilaterally incurred shared well debts of another party, except for correction of emergency situations. Emergency correction costs must be equally shared. |
17 | Require that each party be responsible for: · prompt repair of any detected leak in this water service line or plumbing system; · repair costs to correct system damage caused by a resident or guest at their Property; and · necessary repair or replacement of the service line connecting the system to the dwelling. |
18 | Require equal sharing of repair costs for system damage caused by persons other than a resident or guest at a Property sharing the well. |
19 | Ensure equal sharing of costs for abandoning all or part of the shared system so that contamination of ground water or other hazards will be avoided. |
20 | Ensure prompt collection from all parties and prompt payment of system operation, maintenance, replacement or improvement costs. |
21 | Specify that the recorded agreement may not be amended during the term of a federally-insured or -guaranteed Mortgage on any Property served, except as provided in items 5 and 11 above. |
22 | Provide for binding arbitration of any dispute or impasse between parties with regard to the system or terms of agreement. Binding arbitration must be through the American Arbitration Association or a similar body and may be initiated at any time by any party to the agreement. Parties to the agreement must equally share arbitration costs. |
(P) Individual Residential Water Purification Systems
(1) Definition An Individual Residential Water Purification System refers to equipment, either point-of-entry or point-of-use, installed on Properties that otherwise do not have access to a continuous supply of safe and potable water.
(2) Standard If a Property does not have access to a continuous supply of safe and potable water without the use of a water purification system, the Mortgagee must ensure that the Property has an individual residential water purification system as well as a service contract for the ongoing maintenance of the Property, a plan approved by the local or state health authority, and an escrow account.
(a) Approved Equipment for Individual Residential Water Purification Systems Water purification equipment must be approved by a nationally recognized testing laboratory acceptable to the local or state health authority. The Mortgagee must obtain a certification from a local or state health authority which certifies that:
- A point-of-entry or point-of-use water purification system is on the Property. If the system employs point-of use equipment, the purification system must be employed on each water supply source (faucet) serving the Property. Where point-of-entry systems are used, separate water supply systems carrying untreated water for flushing toilets may be constructed.
- The system is sufficient to ensure an uninterrupted supply of safe and potable water adequate to meet household needs.
- The water supply, when treated by the equipment, meets the requirements of the local or state health authority, and has been determined to meet local or state quality standards for drinking water. If neither state nor local standards are applicable, then quality must be determined in accordance with standards set by the Environmental Protection Agency (EPA) pursuant to the Safe Drinking Water Act in 40 CFR Parts 141 and 142.
- A plan exists that provides for the monitoring, servicing, maintenance, and replacement of the water equipment, and the plan meets the service contract requirements.
(b) Borrower Notice of Water Purification System The Mortgagee must provide written notification to the Borrower that the Property has a hazardous water supply that requires treatment in order to remain safe and acceptable for human consumption. The notification to the Borrower must identify specific contaminants in the water supply serving the Property, and the related health hazard arising from the presence of those contaminants.The Mortgagee must ensure that the Borrower has received a written estimate of the maintenance and replacement costs of the equipment necessary to ensure continuous safe drinking water.
(c) Service Contract for Individual Residential Water Purification Systems Before mortgage closing, the Mortgagee must ensure that the Borrower has entered into a service contract with an organization or individual specifically approved by the local or state health authority to carry out the provisions of the required plan for the servicing, maintenance, repair, and replacement of the water purification equipment.
(d) Approved Plan for Individual Residential Water Purification Systems An approved plan is a contract entered into by the Borrower and Mortgagee and approved by the local or state health authority, and that sets out conditions as described below that must be met by the parties as a condition to insurance of the Mortgage by HUD.The plan must set forth the respective responsibilities to be assumed by the Borrower and the Mortgagee, as well as the other entities who will implement the plan, such as the health authority and the service contractor. In particular:
- The plan must set out the responsibilities of the health authority for monitoring and enforcing the performance of the service contractor, including any successor contractor that the health authority may later have occasion to name. By its approval of the plan, the health authority documents its acceptance of these responsibilities, and the plan should so indicate.
- The plan must provide for the monitoring of the operation of the water purification equipment, as well as for servicing (including disinfecting) and repairing and replacing the system as frequently as necessary, taking into consideration the system’s design, anticipated use, and the type and level of contaminants present. Installation, servicing, repair, and replacement of the water purification system must be performed by an individual or organization approved for this purpose by the local or state health authority and identified in the plan. The plan must refer to specific terms and conditions of the required service contract.
- Under the plan, responsibility for monitoring the performance of the service contractor and for ensuring that the water purification system is properly serviced, repaired, and replaced rests with the local or state health authority that approved the plan. The plan must confer on the health authority all powers necessary to effect compliance by the service contractor. The health authority’s powers must include the authority to notify the Borrower of any noncompliance by the service contractor. The plan must provide that upon any notification of noncompliance received from the health authority, the Borrower may discharge the service contractor for cause and appoint a successor organization or individual as service contractor.
- The Mortgagee must ensure that any plan developed in accordance with this section must provide that an analysis of the water supply must be obtained from the local or state health authority no less frequently than annually, but more frequently if determined at any time to be necessary by the health authority or by the service contractor.
The plan must provide that if the dwelling served by the water purification system is refinanced, or is sold or otherwise transferred with a HUD-insured Mortgage, the plan will:
- continue in full force and effect;
- impose an obligation on the Borrower to notify any subsequent purchaser or transferee of the necessity for the water purification system and for its proper maintenance, and of the obligation to make escrow payments; and
- require the Borrower to furnish the purchaser with a copy of the plan before any sales contract is signed.
(e) Escrow for Maintenance and Replacement of Individual Residential Water Purification Systems The Mortgagee must establish and maintain an escrow account to ensure proper servicing, maintenance, repair, and replacement of the water purification equipment. To the extent permitted under RESPA, the amount to be collected and escrowed by the Mortgagee must be based upon information provided by the manufacturer for the maintenance and replacement of the water purification equipment and for other charges anticipated by the service contractor. The initial monthly escrow amount must be stated in the plan. Disbursements from the account will be limited to costs associated with the normal servicing, maintenance, repair, or replacement of the water purification equipment. Disbursements may only be made to the service contractor or its successor, to equipment suppliers, to the local or state health authority for the performance of testing or other required services, or to another entity approved by the health authority. The Mortgagee must maintain the escrow account as long as water purification remains necessary and the Mortgage is insured by HUD.The Mortgagee must provide the Borrower with the Water Purification Equipment Rider for signature.
(3) Required Documentation
(a) Borrower Notice of Water Purification System A copy of the notification statement (including cost estimates), dated before the date of the sales contract and signed by the prospective Borrower to acknowledge its receipt, must accompany the submission for insurance endorsement. If a sales contract is signed in advance of the disclosure required by this paragraph, an addendum must be executed after the information is provided to the prospective Borrower and after they have acknowledged receipt of the disclosure.
(b) Borrower’s Certification of Water Purification System At the time the application is signed, the Borrower must sign a certification acknowledging that the Property has a water purification system that must be maintained.
(c) Approved Plan for Individual Residential Water Purification Systems The Mortgagee must ensure a copy of the approved plan is provided to HUD.
(d) Service Contract for Individual Residential Water Purification Systems The Mortgagee must ensure a copy of the service contract signed by the Borrower is provided to HUD.
(e) Water Purification Equipment Rider for Individual Residential Water Purification Systems The Mortgagee must ensure a copy of the Water Purification Equipment Rider is provided to HUD.
(Q) Sewage System The Mortgagee must confirm that a connection is made to a public or community sewage disposal system whenever feasible and available at a reasonable cost. If connection costs to the public or community system are not reasonable, the existing Onsite Sewage Disposal Systems are acceptable provided they are functioning properly and meet the requirements of the local health departmentWhen the Onsite Sewage Disposal System is not sufficient and an off-site system is available, the Mortgagee must confirm connection to an off-site sewage system. When the Onsite Sewage Disposal System is not sufficient and an off-site system is not available, the Mortgagee must reject the Property unless the Onsite Sewage Disposal System is repaired or replaced and complies with local health department standards.
(R) Termites For existing Properties, the Mortgagee must confirm that the Property is free of wood destroying insects and organisms. If the appraisal is made subject to inspection by a qualified pest control specialist, the Mortgagee must obtain such inspection and evidence of any required treatment to confirm the Property is free of wood destroying insects and organisms.
iii. Minimum Required Repairs
When the appraisal report or inspection from a qualified Entity indicates that repairs are required to make the Property meet HUD’s MPR or MPS, the Mortgagee must comply with Repair Requirements.
If repairs for Existing Construction cannot be completed prior to closing, the Mortgagee may establish an escrow account in accordance with Repair Completion Escrow Requirements.
iv. Leased Equipment
The Mortgagee must ensure that the Property Value does not include the value of any equipment, including an energy system, that is not fully owned by the Borrower. The Mortgagee must review the terms of the lease on any equipment to ensure they do not contain any Legal Restrictions on Conveyance (Free Assumability).
Appraisal Review
The Mortgagee must review the appraisal and ensure that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property.
v. Quality of Appraisal
The Mortgagee must evaluate the appraisal and ensure it complies with the requirements in Valuation and Reporting Protocols, and any additional appraisal requirements that are specific to the subject Property.
vi. Chain of Title
The Mortgagee must review the appraisal to determine if the subject Property was sold within 12 months prior to the case number assignment date. If the subject Property was sold within the previous 12 months the Mortgagee must review evidence of prior ownership and determine if there are any undisclosed Identity-of-Interest transactions, and for compliance with Restrictions on Property Flipping.
vii. Opinion of Market Value
The Mortgagee must ensure the Market Value of the Property is sufficient to adequately secure the FHA-insured Mortgage.
viii. Reconsideration of Value
The underwriter may request a reconsideration of value when the Appraiser did not consider information that was relevant on the effective date of the appraisal. The underwriter must provide the Appraiser with all relevant data that is necessary for a reconsideration of value.
The Appraiser may charge an additional fee if the relevant data was not available on the effective date of the appraisal. If the unavailability of data is not the fault of the Borrower, the Borrower must not be held responsible for the additional costs. The effective date of the appraisal is the date the Appraiser inspected the