June 3, 2020

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FHA Home Loan Rules For Construction Loan Escrow Accounts

FHA Home Loan Rules For Construction Loan Escrow Accounts

Do you need a construction loan to build on your own land? The FHA One-Time Close construction loan can help you do just that; this mortgage features one loan application and closing date to build your house, and you aren’t required to pay more than the usual low 3.5% down payment for qualified borrowers.

When using a construction loan, the borrower will need to use an escrow account to make the payments for labor, materials, and other construction costs.

But there are rules that govern how these “draws” are to be made; HUD 4000.1 contains those rules, which include the following instructions to the lender:

“At closing, after funds are disbursed to cover the purchase of the land, the balance of the mortgage proceeds must be placed in an escrow account to be disbursed as construction progresses.”

That much we know from the article above, but the next portion of the loan rules is very important:

“The Mortgagee must obtain the Borrower’s written authorization for each draw prior to disbursing funds to the contractor.” This is a process that must follow the FHA-dictated steps.

The only variation would be based on lender requirements, state law, or other regulatory means.

As you can see, FHA loan rules are clear on how these funds must be handled and the rules are also clear on what happens to any excess funds after the construction phase is over. Some borrowers may be hoping at this point that the money can be given to them in case, but FHA loan rules forbid this practice.

Instead, “After completion of construction, the construction escrow account must be fully extinguished, and any remaining funds must be applied to the outstanding principal balance of the permanent Mortgage.”

There are few FHA home loans that permit cash back to the borrower; all of them are either refinance loans or reverse mortgages. FHA Forward mortgages, including FHA One-Time Close construction loans, do not permit cash back to the borrower except in the form of a refund paid for expenses paid in cash that were later financed into the loan amount.

Learn More About FHA, VA and USDA One-Time Construction Close to Permanent / Single-Close Construction Loans

One-Time Close Loans are available with VA, FHA and USDA Mortgages.  We have relationships with several large Mortgage Banking firms who specialize in these loans which also go by the following names: 1 X Close, Single-Close Loan or OTC Loan.

Our extensive research on these programs and their guidelines allow us to educate potential home buyers who want to explore purchasing a newly constructed home versus purchasing a resale home while utilizing the same down payments for each product type.

We are constantly updated on these programs and have extensive knowledge on VA (Department of Veterans Affairs), FHA (Federal Housing Administration) and USDA (United States Department of Agriculture) One-Time Close Construction programs.

We speak directly to the licensed lenders that originate these residential loan types in most states. They are qualified mortgage loan officers who work for lenders that know the product well. Each company has supplied us the guidelines for their product.

If you are interested in being contacted by one licensed lender in your area, please respond to the below questions to save time. All information is treated confidentially.

Please note that investor guidelines for the FHA, VA and USDA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multifamily units (no duplexes, triplexes or fourplexes).  Home types include:  Site-Built, Modular or Manufactured Homes.

In addition, the following are “NOT” allowed under these programs:
Kit Homes – Steel Framing Kits, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar or Wind Powered Homes.

Your response to  onetimeclose@fhanewsblog.com authorizes us to share your personal information with a licensed mortgage lender that is familiar with your area to contact you.

  1. Send your first and last name, e-mail address, and good contact number.
  2. Tell us the city and state of the proposed property.
  3. Tell us your credit score and/or the Co-borrower’s credit score, if known. 620 is the minimum qualifying credit score for this product.
  4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, the down payment is $0 up to the maximum amount that the debt ratio will allow – there are no maximum loan amounts as per the Department of VA. Most lenders will go up to $750,000. If not, the FHA down payment is 3.5% up to the maximum FHA Lending Limits for your county and the USDA down payment is $0 and based on maximum income.
Bruce Reichstein - FHA News Author

By Bruce Reichstein

November 20, 2019

Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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