What are the requirements for the final release of 203(k) rehabilitation escrow funds?

The mortgagee must include the interest earned in the final payment on the rehabilitation escrow account and may include the total of all holdbacks. However, if it is required to protect the priority of the security instrument, the mortgagee may retain the holdback for a period not to exceed 35 days (or the time period required by law to file a lien, whichever is longer), to ensure compliance with state lien waiver laws or other state requirements.  

Before final release of rehabilitation escrow funds for a Standard 203(k), the mortgagee must approve the final inspection and draw request signed by the Consultant, contractor, and borrower.  

Before a final release is made to any contractor for a Limited 203(k), the mortgagee must determine that all work by the contractor has been completed, is acceptable by the borrower, and all necessary inspections have been made with acceptable documentation.  

For both Standard 203(k) and Limited 203(k) the mortgagee must: 
•obtain the Borrower’s Letter of Completion signed by the borrower indicating satisfaction with the completed work and requesting a final inspection and final release of funds; 
•obtain a Certificate of Occupancy, or equivalent, if required by the local jurisdiction; 
•obtain all inspections required by the local jurisdiction; 
•complete the Final Release Notice authorizing the final payment; 
•provide the mortgagee’s extension approval if applicable; and 
•obtain a release of any and all liens arising out of the contract or submission of receipts, or other evidence of payment covering all subcontractors or suppliers who could file a legal claim.  

For additional information see Handbook 4000.1 II.A.8.a.xviii(C)(2) at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04937