Can an FHA Loan Be Disapproved Because the Property is on Well Water?

In many rural and even some suburban areas, a home's only source of water comes from a well. The well, which may be individual or shared, pumps water out of the aquifer and directly into the homes it serves. The Federal Housing Administration does not automatically decline loans just because the home has a well. However, the well must meet certain standards for approval. If the well does not meet all of FHA’s standards, then the lender must decline the loan.

Some older homes still receive their water from a well even though they have access to city utilities. The lender can require the homeowner stop using the well and begin using city utilities unless the cost to hook into the city utilities is excessive. Often lenders consider anything more than 3 percent of the home’s value as excessive. For example, if a home worth $100,000 has access to both a well and to city water, but the cost of hooking into the city water was $5,000, then FHA does not require the homeowner hook into city water. If the cost was only $2,000, then the lender can require the homeowner hook into the city water or decline the loan.

The well's location is important in relationship to the house. The well cannot be located inside the house or inside a structure. The only time it’s acceptable for the well to be located inside the structure is if the home is located in subarctic or arctic areas of the country. The well must also be a reasonable distance away from any leech field or septic system. Typically, the well should be at least 100 feet away from any absorption, leech or seepage field used to dispose of human waste.

Any new wells put on a property must be dug at least 20 feet deep. The well also must be cased in steel or other leak-proof and durable materials approved by the local health authority. The well must be inspected and approved by the county authority. Any well that does not meet the county's or local government's requirements, is not approvable through the FHA.

Sometimes, more than one homeowner shares a well. One well can be at the corner of four different properties and serve all four homes. In this scenario, the borrower must supply a shared well agreement to the lender. Typically, a shared well agreement is signed and filed with the county as part of the record for the home. The lender reviews this to ensure the home will continue to receive water from the well without interruption. Additionally, shared wells must have professional water testing done prior to full FHA approval. Homes with wells that do not pass inspection are not eligible for financing through the FHA.