August 19, 2022
Some new borrowers have misconceptions about home loans in general; they may think that FHA mortgages are for first-time buyers only, they may assume you have to make a 20% down payment, and they may also hope to apply for more home loan than they need to make the purchase with the idea of taking the excess in cash.
If you make plans for a home loan based on some of those assumptions, you may be in for a surprise.
FHA loans do not require you to be a first-time home buyer, you do not have to make a 20% down payment, and you generally cannot take cash at closing time except for refunds.
When you apply for an FHA home loan, that application will be for a loan amount based on the fair market value of the property plus any permitted items that can be financed into the loan amount.
If you apply for a construction loan or an FHA 203(k) Rehabilitation loan, you will have loan funds going into escrow to pay for contractors and materials.
For such loans, there may be borrowers who want to be their own builders. FHA loan rules say that this is possible but typically, participating FHA lenders typically don’t permit you to be your own contractor.
That means you won’t have access to loan funds in escrow, and this money is used strictly to handle the payments for the labor, inspections, materials, etc.
And why can’t a borrower apply for more loan than is needed and take the rest in case? Single-family home loans under government programs (in general) have rules like this. You cannot use home loan funds for unapproved reasons, including situations where the project comes in under budget and the buyer is hoping for a refund.
This is also true of loan funds provided through the FHA Energy Efficient Mortgage (FHA EEM) add-on, which provides extra loan funds for approved improvements to the home.
EEM money is tightly controlled in the same way; you can only pay for projects that are approved under the FHA EEM program–you can’t just get the extra money and spend it on improvements you don’t discuss with the lender.
Speak to a participating FHA lender to discuss your loan options and what to expect at closing time with your FHA home loan.
What can’t you do with FHA loan money? Essentially you can’t use mortgage money to do anything you don’t agree upon with the lender–at least where construction loans, rehab loans, and purchase loans are concerned. Cash-out refinancing is a different story altogether, and is a subject for another article.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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