A semiconductor device has a substrate with a plurality of conductive vias formed through the substrate and conductive layer formed over the substrate. A first encapsulant is deposited over the substrate outside a die attach area of the substrate. The first encapsulant surrounds each die attach area over the substrate and the die attach area is devoid of the first encapsulant. A channel connecting adjacent die attach areas is also devoid of the first encapsulant. A first semiconductor die is mounted over the substrate within the die attach area after forming the first encapsulant. A second semiconductor die is mounted over the first die within the die attach area. An underfill material can be deposited under the first and second die. A second encapsulant is deposited over the first and second die and first encapsulant. The first encapsulant reduces warpage of the substrate during die mounting.