Using *only* #1 is a terrible idea for survival/horrors due to the lack of exploration. Survival/horror games need to develop the environment somewhat otherwise the game is just a tour with hostiles blocking the path. Resident Evil 4 had a hybrid of 1 and 2 and made a brilliant survival/horror game. For the most part the game is linear, but there are plenty of buildings and wide spaces to explore. You can go into a house and raid it for ammo and herbs. Then go out the front door and continue down the path.
But there's no reason you can't use all 3 and make a legendary survival/horror that everyone will remember.
Silent Hill 2 had aspects of all 3. When you first enter the town you're located in a #3 environment. You're lost in a world of thick fog that's infested with monsters and you have to find your way to progress. They block off paths and bait you with blood to try and get you where you need to go so progress, but you're mostly lost in a scary, monster invested environment, with poor vision... Completely alone. After the hospital, again, you have to explore the town. This time in complete dark with half as much vision as the fog and probably 3 times as many monsters as before.
Then there are the areas like the apartment, hospital, and prison where you become locked in, creating a #2 area. However, unlike the Spencer mansion most doors in this game are permanently locked and/or broken. With most everything locked, it gives the area a claustrophobic feel. And if that wasn't unconformable enough, the grotesque factor makes the setting even worse.
And, of course, there's the underground where James keeps jumping down seemingly bottomless pits. Backtracking is either minimal or impossible, probably qualifying a #1 setting, but the claustrophobic factor is still there. And there's less health lying around, so when gearing low on health in the narrow halls it makes the game incredibly tense.