How FHA Construction Loan Draw Disbursements Work
February 12, 2024
Some people aren’t sure how a single-close construction loan works when thinking about how the builders are paid, materials are purchased, etc. Who holds the money, who makes the payment? Is the borrower the person controlling the purse strings, so to speak?
This article has some important information on all of the above, but remember that your experience may vary. Much depends on the lender, the state you live in, and the contractors you choose
What to Know About Escrow
FHA Construction loan funds go into escrow. As the borrower, you don’t have unrestricted access to loan funds. You don’t control the money, it is paid as needed as the building the project unfolds. In some situations you’ll find that this cash is paid on an as-needed basis rather than paying a lump sum up front. That said, there are “first” draws and “final” draws that may amount to more than some of the other payments made during the construction.
How does the contractor get paid? In typical cases a builder must submit a request for a draw or a disbursement which may be wired directly to a contractor account.
What to Know About the Initial Disbursement
You may find the first payment on the construction loan happens at or around closing time. That first payment could be used to pay off a land purchase if needed, and a “start up draw” paid to the contractor may also be necessary.
What to Know About Special Orders
In situations where special order items are needed for the building project, those payments could be rendered on a percentage basis depending on the schedule of draws from escrow.
This is a process that may be tightly controlled--your contractor could be required to make a formal request for these funds, AND provide proof of purchase.
What to Know About the Final Draw from Escrow
At the end of the construction, a final draw may be paid to the contractor. This may require the filing of an appraisal report. Another potential requirement? Obtaining an endorsement from a title company. Borrowers are not entitled to any remaining funds in escrow as “cash back.”
Typically FHA single-close construction loans do not allow cash back to the borrower for purchase loans except for refunds. Ask your loan officer if you aren’t sure if you are entitled to a refund, or aren’t sure what happens to the loan funds if the project comes in under budget.
------------------------------
RELATED VIDEOS:
Consider the Benefits and Risks of a Joint Loan
Borrowers Should Know About the Origination Fee
Everyone Needs to Pay Their Property Tax
FHA Loan Articles
October 30, 2021The FHA Rehabilitation Loan program allows lenders to cover the purchase or refinance, as well as the rehabilitation of the home, as part of a single mortgage. This loan can be used to finance a property that is at least one year old with a total cost of repairs amounting to at least $5,000
October 16, 2021The FHA’s aim is to make homeownership more affordable and accessible for Americans, and it has been doing so for decades. It insures home loans made by FHA-approved lenders so borrowers can purchase single-family and multi-family homes in the US and its territories.
September 20, 2021A down payment is an upfront installment or part of a larger amount paid on a purchase. The remainder is paid off in separate installments, usually with interest, as part of a loan. The down payment represents your initial ownership stake in the home you continue to make payments on.
September 2, 2021For many first-time home buyers, the FHA loan is a popular option. With its lenient credit and income requirements, it appeals to young borrowers who don’t have an extensive credit history, or enough money saved up for a down payment.
August 9, 2021Many first-time homebuyers need some help understanding and navigating the ins and outs of the mortgage process, and down payments are an essential part of that. A down payment is an upfront installment made on a large purchase while the remainder is paid off with a loan.
