HUD 232 Loan Escrow Requirements
HUD 232 new construction loans require a working capital escrow of 4% of the loan amount. 2% of this, or half the amount, is a construction contingency escrow intended to help fund cost overruns or approved change orders that might occur.
Escrow is when sums of money, deeds, securities, or property is held in trust (in escrow) until a transaction’s conditions are met. Once the conditions are met, the escrow agent transfers funds (or whatever was held in escrow) to the appropriate party.
If, by the end of the construction process, the construction contingency escrow has not been used, it is refunded to the developer. The other 2% of the escrow, the working capital escrow, is refunded to the lender 12 months after closing, as long as the project has experienced 6 consecutive months of break-even occupancy, or a DSCR of 1.0 (this calculation can include ancillary income sources as well as rent.)