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FHA loans are one of the best options for young, first-time home buyers who have not had as much time to save for a large down payment or establish a high credit score.

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How One-Time Construction Loan Funding Works

How One-Time Construction Loan Funding Works
There is a major question some new borrowers have about home loans in general, that also applies to construction loans in particular. If you want to apply for a One-Time Close construction loan that’s guaranteed by the FHA, there are certain rules about how loan funding is handled that you should know about.

These are important details to know going into the planning stages of your mortgage. Why? Because some borrowers make plans for their loans based on certain assumptions. If you assume the wrong things you could be due for a major rethink of your mortgage. 
One such assumption has a lot to do with how loan funds are accessed, disbursed, and used for the mortgage. Some borrowers might think they can do more with home loan funds than the rules permit. What’s the reality?

FHA Home Loan Funds Are Meant for Specific Purposes

When you apply for a construction loan, that application is approved for a specific amount based on the cost of building the home, plus any other permitted items to be added into the loan. For construction loans that means funds are placed in escrow and when a contractor needs to be paid, there is a draw from escrow.

Draws from escrow are not unrestricted--the borrower typically won’t have personal access to these funds.

And borrowers who may want to act as their own contractor should know that participating FHA lenders typically don’t permit this, even though FHA loan rules may allow it. Borrowers simply don’t have access to these loan funds in any way except for their intended purpose, which is to pay third-party contractors for labor, permits, and materials.

What You Cannot Do With Mortgage Money

The borrower cannot use home loan funds for unapproved purposes. That includes situations where the borrower hopes to apply for more loan than is needed for the construction project and take the remainder in cash. But the only money you can be paid at closing time is typically for items paid in cash upfront and later included in the loan amount. A refund would be due in such cases.

Under-Budget One-Time Close Construction Loans

What happens if the construction project comes in under budget? The same rules mentioned above will apply. Borrowers do not get unrestricted cash back.

The type of home loan you can get under the FHA program that features cash at closing time is an FHA Cash-Out Refinance, and borrowers who are aged 62 or older may qualify for an FHA Reverse Mortgage. That type of loan also features cash at closing time in typical cases.


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FHA Loan Articles

When not to Consider Refinancing a Home

There are plenty of reasons to delay plans to refinance a home. One reason has made big headlines. When borrowers face higher interest rates than originally approved for, that is a good reason to wait to refinance.

How FHA Construction Loan Draw Disbursements Work

When you are approved for an FHA One-Time Close Construction loan, you get a single loan that pays for both the costs to build the house, and serves as the mortgage. One application, one approval process, and one closing date.

Mortgage Rate Predictions for 2024

In the last days of November 2023, mortgage loan rates flirted with the 8% range but have since backed away, showing small but continued improvement. What does this mean for house hunters considering their options to become homeowners soon?

Is It Cheaper to Buy a Home With an FHA Loan or to Rent?

In May 2023, USA Today published some facts and figures about the state of the housing market in America. If you are weighing your options for an FHA mortgage and trying to decide if it’s cheaper to buy or rent, your zip code may have a lot to do with the answers you get.

Why Do FHA Loans Have Borrowing Limits?

FHA loan limits serve as a crucial mechanism to balance financial sustainability, regional variations in housing costs, and the agency's mission to promote homeownership, particularly for those with limited financial resources.

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