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B4-1.2-05, Requirements for Verifying Completion and Postponed Improvements (03/01/2023)

Introduction

This topic contains information on requirements for verifying completion of construction and repairs, and requirements for postponed improvements, including:


Overview

Generally, improvements, alterations, and repairs on the subject property must be complete when the mortgage is sold to Fannie Mae. Lenders must obtain evidence of completion and Fannie Mae allows for a variety of methods depending on the type of valuation method and condition (completion, alteration, or repair) that must be confirmed.

Additionally, in some circumstances, Fannie Mae allows a loan to be sold prior to improvements or repairs being completed if the lender complies with the requirements related to postponed improvements.


Form 1004D and Completion Alternatives

Form 1004D

The Appraisal Update and/or Completion Report (Form 1004D) is used to update an appraisal or provide confirmation that the requirements or conditions in an appraisal report have been met (such as completion of construction or repairs).

The appraiser can complete the Completion Report section of Form 1004D based on an on-site visual inspection of the property. The appraiser may also complete the form based on alternative methods, such as virtual inspections, digital photos, site videos, or other technological solutions. All completion documentation must include one or more visually verifiable exhibits. A link to the digital exhibits from within the form is acceptable but must be accessible by Fannie Mae for the life of the loan. These exhibits must be unaltered and able to be authenticated using metadata and the geocode for the subject property.

See  B4-1.2-04, Appraisal Age and Use Requirements, for certifications completed by substitute appraisers.

Attestation Letters

Fannie Mae also permits other completion alternative methods - attestation letters - to verify completion of construction, alteration, or repairs in lieu of Form 1004D.

Borrower/builder attestation letter: For new or proposed construction, a letter is permitted to confirm the property was completed and constructed in conformity with the plans and specifications, amendments, and change orders. The borrower/builder attestation letter must include (at a minimum) the following items:

  • borrower name,
  • property address or legal description if the address is not available,
  • certification language that the property was constructed in conformity with the plans and specifications including any amendments or changes,
  • signatures and dates by the borrower(s) and builder, and
  • exterior and interior photos of the property (see  B4-1.2-01, Appraisal Report Forms and Exhibits).

If a letter signed by both parties is not obtainable, then a Form 1004D completed by the appraiser is required.

Borrower attestation letter: A letter is permitted to confirm completion of certain alterations or repairs for existing construction. The letter must include (at a minimum) the following:

  • borrower name;
  • property address;
  • certification language that the alteration or repair was satisfactorily completed;
  • signatures and date of the borrower;
  • visually verifiable exhibits of the completed work; and
  • one of the following
    • signature of the qualified professional,
    • a professionally prepared report, or
    • paid invoices for the alterations or repairs.

When either of these attestation letter options is used, a link within the letter to any digital exhibits is acceptable but must be accessible by Fannie Mae for the life of the loan. These exhibits must be unaltered and able to be authenticated using metadata and the geocode for the subject property. The letter and all documentation must be retained in the loan file.

Criteria for Use of Form 1004D and Completion Alternatives

Use of Form 1004D and completion alternatives varies depending on the type of valuation method and condition (completion, alteration, inspection, or repair) that must be verified.

                                                                                                     Appraisals

                                                              (Any appraisal report form including Hybrid and Desktop)

Appraisal "Subject to" Condition Performer Documentation Options
New or proposed construction - completion per plans and specifications Appraiser Form 1004D with site visit
Appraiser Form 1004D with virtual inspection
Borrower and builder Borrower/builder attestation letter with supporting evidence
Existing construction - repairs or alterations Appraiser Form 1004D with site visit
Appraiser Form 1004D with virtual inspection
Borrower Borrower attestation letter with supporting evidence
Existing construction - inspections requiring a professionally prepared report Qualified professional

Professionally prepared inspection report

The lender must determine if repairs are required as a result of the inspection, verification per above requirements.

                                                                                          Property Data Collection
Condition Performer Documentation
Existing construction - repairs or alterations Borrower Borrower attestation letter with supporting evidence
Existing construction - inspection requiring a professionally prepared report Qualified professional

Professionally prepared inspection report

The lender must determine if repairs are required as a result of the inspection, verification per above requirements.

Note: The alternative Form 1004D completion method and attestation letters are not permitted for verifying completion for HomeStyle Renovation transactions.


Verification of Completion: New or Proposed Construction

When the property securing the mortgage is new or proposed construction, the appraisal must be based on either plans and specifications, an existing model home, or other information sufficient to identify the quality and character to accurately report the interior features of the proposed improvements.

Verification of completion of construction is required (in accordance with the requirements above) before sale of the loan to Fannie Mae, unless the lender complies with the postponed improvements policies described below.


Verification of Completion: Existing Construction

Lenders must review the appraisal to ensure that the property does not have minor conditions or deferred maintenance items that affect the safety, soundness, or structural integrity of the subject property. See B4-1.3-06, Property Condition and Quality of Construction of the Improvements, for information concerning property condition and quality of construction ratings.

The tables below provide requirements related to existing properties that have physical deficiencies, minor conditions, or deferred maintenance items that may or may not affect the safety, soundness, or structural integrity of the property.

Requirements for Existing Construction When There are Minor Conditions or Deferred Maintenance Items that Do Not Affect the Safety, Soundness, or Structural Integrity of the Property
 

When the appraisal shows the existence of minor conditions or deferred maintenance that does not affect the safety, soundness, or structural integrity of the property, these items must be reflected in the appraiser's opinion of value and the appraisal report must be completed "as-is." Items meeting these criteria require the appraiser to report and comment on the effect these items may have on the subject property's value and marketability. The lender will then evaluate and determine if any additional course of action is required to comply with Fannie Mae's safety, soundness, and structural integrity requirements. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, missing handrails, or cracked window glass and are typically due to normal wear and tear. The lender is not required to ensure that the borrower has had these items repaired prior to sale of the loan to Fannie Mae when the appraisal is completed "as-is."

  If there are minor conditions or deferred maintenance items to be remedied or completed after closing, the lender may escrow for these items at its own discretion and still sell the loan to Fannie Mae prior to the release of the escrow as long as the lender can ensure that these items do not affect the safety, soundness, or structural integrity of the property.
  Lenders must ensure the escrow account is a custodial account that satisfies Fannie Mae’s criteria for custodial accounts and depositories as outlines in Servicing Guide topic A4-1-02, Establishing Custodial Bank Accounts.
Requirements for Existing ConstructionWhen There are Incomplete Items or Conditions that Affect the Safety, Soundness, or Structural Integrity of the Property
 

When an appraisal is required and there are incomplete items, physical deficiencies, or items affecting the safety, soundness, or structural integrity of the improvements, the appraisal must be "subject to" completion of the specific repairs or alterations. This may include but is not limited to foundation settlement, water seepage, active roof leaks, worn roof shingles, inadequate electrical service or plumbing fixtures, etc.

Incomplete items, physical deficiencies, or items affecting safety, soundness, or structural integrity may also be identified through the property data collection process.

In all cases, the lender must verify completion before the loan is sold to Fannie Mae. See Form 1004D and Completion Alternatives above for the specific requirements.


Postponed Improvements

Fannie Mae allows the sale of a loan before construction or energy improvements are complete if certain requirements are met.

The table below describes requirements related to properties that are new or proposed construction that are not complete when the loan is sold to Fannie Mae.

Requirements for New or Proposed Construction
 

Loans may be delivered before postponed items are complete; however, the postponed improvements must be completed within 180 days of the date of the note. Acceptable postponed items include items that:

  • are part of the sales contract (third-party contracts are not permissible);

  • are postponed for a valid reason, such as inclement weather or a shortage of building materials; and

  • do not affect the ability to obtain an occupancy permit.

 

Completion must be confirmed using Form 1004D or an acceptable completion alternative as described above.  All documentation must be retained in the loan file.

 

The cost of completing improvements must not represent more than 10% of the “as completed” appraised value of the property.

 

Lenders must establish a completion escrow for the postponed improvements, by withholding from the purchase proceeds funds equal to 120% of the estimated cost for completing the improvements. However, if the contractor or builder offers a guaranteed fixed-price contract for completion of the improvements, the funds in the completion escrow only need to equal the full amount of the contract price.

  Lenders must ensure the escrow account is a custodial account that satisfies Fannie Mae’s criteria for custodial accounts and depositories as outlined in Servicing Guide topic A4-1-02, Establishing Custodial Bank Accounts.
 

Lenders and borrowers must execute an escrow agreement that states how the escrow account will be managed and how funds from the escrow account will be disbursed.

 

The completion escrow may not adversely affect the mortgage insurance or title insurance.

 

After a satisfactory Form 1004D or completion alternative is obtained, the lender must release the final draw from the escrow account, which should include any funds in excess of the amount needed to pay for completion of the postponed items.

 

Lenders must obtain a final title report, which must not show any outstanding mechanic’s liens, take any exceptions to the postponed improvements, or take any exceptions to the escrow agreement. If the final title report is issued before the completion of the improvements, lenders must obtain an endorsement to the title policy that ensures the priority of Fannie Mae’s lien.

 

Requirements for HomeStyle Energy Improvements on Existing Construction

The table below provides the postponed improvement requirements for a HomeStyle Energy loan. (These requirements are not applicable when energy improvements are included in HomeStyle Renovation loan). 

Requirements for HomeStyle Energy Improvements on Existing Construction
 

Mortgages may be delivered before the energy-related improvements are complete; however, the postponed improvements must be completed within 180 days of the date of the mortgage note. Acceptable postponed items include items that will not prevent the issuance of an occupancy permit.

 

A certification of completion must be obtained to verify the work was completed and must:

  • be completed by the appraiser,

  • state that the improvements were completed in accordance with the requirements and conditions in the original appraisal report, and

  • be accompanied by photographs of the completed improvements.

 

Lenders must establish a completion escrow for the postponed energy-related improvements by withholding funds equal to 120% of the estimated cost for completing the improvements. However, if the contractor offers a guaranteed fixed-price contract for completion of the improvements, the funds in the completion escrow only need to equal the full amount of the contract price.

  Lender must ensure the escrow account is a custodial account that satisfies Fannie Mae’s criteria for custodial accounts and depositories as outlined in Servicing Guide topic A4-1-02, Establishing Custodial Bank Accounts.
 

Lenders and borrowers must execute an escrow agreement that states how the escrow account will be managed and how funds from the escrow account will be disbursed.

 

The completion escrow may not adversely affect the mortgage insurance or title insurance.

 

Once a certificate of completion is obtained, the lender must release the final draw from the escrow account, which should include any funds in excess of the amount needed to pay for completion of the postponed items. Any funds remaining in the escrow account after the work is completed must be applied to reduce the unpaid principal balance of the mortgage loan. The value of sweat equity and “Do It Yourself” improvements are not reimbursable.

 

Lenders must obtain a final title report, which must not show any outstanding mechanic’s liens, take any exceptions to the postponed improvements, or take any exceptions to the escrow agreement. If the final title report is issued before the completion of the improvements, lenders must obtain an endorsement to the title policy that ensures the priority of Fannie Mae’s lien.

See  B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties, for other requirements related to loans with energy-related improvement features.


Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2023-02 March 01, 2023
Announcement SEL-2019-01 February 06, 2019

 

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