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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 FHA Construction Loan Draw Disbursements Work

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.

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.


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More FHA Loan Articles

Can Rental Income Be Used to Qualify for an FHA Mortgage?

FHA loan rules for single family purchase loans include guidelines for the lender to use if the applicant has rental income. Some want to know whether it is possible to qualify for an FHA mortgage using rental income. The real issue is whether the rental income meets FHA loan rules.

Questions to Ask About an FHA Home Loan Before You Apply

Planning your FHA loan means asking some important questions early in the process.  The most obvious question is associated with the type of home you want. How large a house do you need? FHA mortgages allow the purchase of homes with between one and four living units.

Ready To Apply for an FHA Loan?

Before you get ready to commit to a home loan application, it’s good to review your circumstances and ask a few basic questions about your loan, your plans, and the home itself. Believe it or not, knowing what type of home loan you need is an important step.

FHA One-Time Close Construction Loans: Issues to Consider

It’s a great option to consider if you want to build your dream home on your own land instead of buying someone else’s already-lived-in house. FHA One-Time Close mortgages are also referred to as single-close construction loans--you’ll see these terms used interchangeably.

FHA Appraisal Rules for Basements

The appraisal process is a very important part of buying a home. When you are budgeting and planning for your loan, you may want to set aside some extra funds in case there are corrections required as the result of an appraisal.

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