How to Set Up an Escrow Account for the Construction of a New Home

An escrow account will distribute funds as you build a home.

An escrow account will distribute funds as you build a home.

If your American dream involves building your own home, the process will be a little different from simply buying an existing home. Setting up an escrow account will be one of the first things that happens after you close the deal for the construction of the new home. This account will fund the entire construction process, paying the contractor and buying the necessary materials to create your dream home.

Apply to become qualified for a new construction mortgage with a lender. Provide the necessary documents to prove your income and employment. The lender will perform a thorough credit check to establish your eligibility for the mortgage. With your pre-qualification, you will know how much home you can afford and you will be ready to approach a contractor to begin the process of building your home.

Ask the lender for recommendations for contractors to build your home. Many lenders have a list of contractors they often work with. Speak with two or three different contractors to find one who will deliver the specifications you desire for your home. Make an agreement with the contractor of your choice and get a formal design and building proposal from the contractor.

Provide the design and building proposal to the lender for approval. After you receive approval, you are ready to close on the construction mortgage. After you close, ensure that the lender sets up the escrow account for the construction of your new home. Get the account details from the lender.

Oversee the establishment of the escrow account. The initial balance in the account must be the full amount of your mortgage -- the funds necessary to build the home to completion. The contractor will establish the number of necessary draws to complete the entire construction project. The contractor will generally draw from the account as the excavation, carpentry, plumbing and electrical steps of your construction are completed.


  • Before the contractor can submit another draw request for additional funds from the escrow account, the lender will inspect the work to ensure that the contractor has completed the work up until that point. As the buyer, you also have the right to inspect the work prior to the approval of draw requests.
  • After paying the contractors from the escrow account, the lender will collect lien wavers from the contractors, releasing their rights to file construction liens against the home for work completed.

Video of the Day

Brought to you by Sapling
Brought to you by Sapling

About the Author

Kathryn Hatter is a veteran home-school educator, as well as an accomplished gardener, quilter, crocheter, cook, decorator and digital graphics creator. As a regular contributor to Natural News, many of Hatter's Internet publications focus on natural health and parenting. Hatter has also had publication on home improvement websites such as Redbeacon.

Photo Credits

  • Creatas Images/Creatas/Getty Images