FHA/VA loan requirements for homes served by septic may leave sellers feeling crappy...

"Agents:
If you have a listing where the property is hooked up to septic, but sewer is now available then the following rule applies for FHA/Va financing: The connection must be made to a public water/sewer system or a community water/sewer system, if connection costs to the public or community system are reasonable. Reasonable is defined by 3% or less of the estimated value of the property. If the connection costs exceed 3%, then the existing on-site systems will be acceptable provided they are functioning properly and meet the requirements of the local health department.

On Coventional loans, there is no requirement to hook up to the community sewer system."

Thanks to a contact of ours at Golf Savings Bank for sending out this notice.

We received this message regarding properties on septic being REQUIRED to connect to local sewer systems, if a system is available. There are certain areas of King, Snohomish, and Pierce County where this may affect your sale. I can think offhand of areas in or near Kirkland's Rose Hill, Bridle Trails, and Juanita neighborhoods that would likely fit this description and requirement - see notes below for more info.

So, why is this requirement a big deal? A few reasons...

1. Hooking up to sewer usually means higher fees for the homeowner because there is a connection fee.

2. Besides the initial fee, King County has a 15 year assessment worth a few thousand bucks for any new home connecting to the Metro sewer system. It would need to be researched to confirm if the 15 year fee applies, but I'm guessing it would be. I'll check with Michelle Britt the gal that works at King County in this department and report back later with a confirmation.

3. Sewage fees typically run much higher in cost than septic, plus they are ongoing monthly utility fees while septic has most of its costs associated with occasional inspections, pumping, and repairs. If you're not a heavy water user, and especially if you have a gravity system rather than a pump system in your septic design then it's pretty low cost overall.

Other considerations...

1. If you're a seller who is house rich and cash poor - this could mean anyone in financial hardship, going through a costly divorce, or elderly on fixed incomes, you may not have the money to make the connection.

2. That may mean that a buyer has to take on this risk in a transaction which may be unlikely unless they feel they're getting a "deal" on the home itself (ie, lower sale price).

3. If you need to try and sell quickly because of a job change (or loss), or you didn't know about this in advance of trying to sell and move out of area, it could derail or complicate your plans because of the time needed to get it completed.

When you think about the fact that home sales aren't always done because of good circumstances, having this be a requirement when selling can make it a hardship on some. The fact that FHA is a strong percentage of the loans being financed today means it will also affect some sales negatively. Anyone with less than 20% down is currently getting directed toward FHA loans, and VA loans are picking up with more and more people going to, and coming back from, military action overseas.

Finally, when you think of 3% as property value - consider the housing prices we have here in the Seattle/Bellevue metro area. Just in those Kirkland neighborhoods alone these are the sales stats on 184 properties that met septic and sewer available notation in the NWMLS since January 2007 using the following parameters:

Property Type Residential City Kirkland
Statuses Active, Contingent, Pending BU Requested (2/21/2009 or after) , Pending Inspection (2/21/2009 or after) , Pending (2/21/2009 or after) , Sold (1/1/2007 or after)
Sewer Sewer Available OR Septic

If 3% is the "reasonable" test for requiring the change, then the cost be upwards of $20,000 based on the average sale price and a seller would be required to pay for it. Ouch!

If you are a seller who will be impacted by this lending requirement, then be sure to discuss it with your agent and do your homework in advance of going on market. FHA max JUMBO loan guidelines have $567,500 as their top loan value so if you're priced under $709,375 this could apply to you.