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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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More FHA Loan Articles

Home Loan Closing Costs

When you buy a home with an FHA mortgage, cash for closing costs and your down payment is required. It would be easy to assume you simply give the lender cash in the specified amount and that’s the end of the story.

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.

One-Time Close Construction Mortgages vs. Two-Close Loans

Did you know there is an FHA loan option that lets you build a house from the ground up? You can use this mortgage to build on land you own or on land you buy as part of the loan. But you will want to address some issues comparing construction loan options.

FHA Loans, Appraisals, and Excess Land

Sometimes when buying a home there may be a question of surplus or excess land. You likely won’t face this issue when buying a condo unit, but for other types of purchases, this may be an important factor in the appraisal process.

FHA Loan Income Rules to Consider Before Applying

Your lender is required to make sure you can realistically afford your mortgage, and that means verifying that your income is stable, reliable, and will continue after your mortgage has closed. What some don’t realize about this process is that there are standards for verifying income.


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