Selling Guide

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B4-1.2-03, Requirements for Postponed Improvements (02/06/2019)

Introduction

This topic contains information on postponed improvements, including:

 

Overview

Improvements for the subject property must be complete when the mortgage is delivered to Fannie Mae. However, in some circumstances, Fannie Mae does allow a loan to be delivered prior to improvements being completed.

 

Requirements for New or Proposed Construction

When the property securing the mortgage is new or proposed construction, the appraisal may be based on either plans and specifications or an existing model home. The table below describes requirements related to properties that are new or proposed construction that are not complete when the mortgage is delivered to Fannie Mae.

Requirements for New or Proposed Construction
 

Mortgages may be delivered before postponed items 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:

  • 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.

 

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.

 

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.

 

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.

 

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 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
  If the appraiser reports the existence of minor conditions or deferred maintenance items that do not affect the safety, soundness, or structural integrity of the property, the appraiser may complete the appraisal “as is” and these items must be reflected in the appraiser’s opinion of value. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, 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 this work completed prior to delivery of the loan to Fannie Mae.
  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 deliver 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 Construction When There are Incomplete Items or Conditions that Do Affect the Safety, Soundness, or Structural Integrity of the Property
  When there are incomplete items or conditions that do affect the safety, soundness, or structural integrity of the property, the property must be appraised subject to completion of the specific alterations or repairs. These items can include a partially completed addition or renovation, or physical deficiencies that could affect the safety, soundness, or structural integrity of the improvements, including but not limited to, cracks or settlement in the foundation, water seepage, active roof leaks, curled or cupped roof shingles, or inadequate electrical service or plumbing fixtures. In such cases, the lender must obtain a certificate of completion from the appraiser before the mortgage is delivered to Fannie Mae. Although the original appraiser should complete any required certification of completion, the lender may use a substitute appraiser.

See B4-1.2-02, Appraisal Age and Use Requirements, for certifications completed by substitute appraisers.

  The certification does not need to include photographs of the property unless those that accompanied the original appraisal report are no longer representative of the completed property.

 

Requirements for HomeStyle Energy Improvements on Existing Construction

The table below provides the postponed improvement requirements for a loan with HomeStyle Energy improvement feature(s). See B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties, for other requirements related to loans with energy-related improvement features.

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.

 

See B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties, for information about the maximum cost of improvements.

See B5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower Eligibility, for information about the maximum cost of improvements that may be included when HomeStyle Renovation is combined with energy-related 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.

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