Question

After the renovation phase of a conventional rehab loan project is complete, any unused funds held in the rehab escrow account must be:

A) Returned to the borrower.
B) Applied to reduce the loan balance.
C) Transferred to the contractor.
D) Kept by the lender as profit.

Answer 1

Unused funds in a rehab escrow account from a conventional rehab loan should be applied to reduce the loan balance, minimizing the interest accrued on the loan.

Step-by-step explanation:

After the renovation phase of a conventional rehab loan project is complete, any unused funds held in the rehab escrow account must be applied to reduce the loan balance. The purpose of this is to ensure that the borrower is not charged interest on funds that were not needed for the renovation. By applying the unused funds to the principal of the loan, the total amount of debt is reduced and, therefore, the amount of interest that accrues is also minimized. The option to return unused funds to the borrower, transferring them to the contractor, or the lender keeping them as profit are incorrect as per usual loan guidelines.