B5-3.2-06, HomeStyle Renovation: Renovation Contract, Renovation Loan Agreement, and Lien Waiver (02/02/2022)

The renovation contract must

• itemize the specific work that the contractor agrees to perform for the borrower;

• state the agreed-upon cost of the renovation;

• identify all subcontractors and suppliers; and

• include an itemized description that establishes the schedule for completing each stage of the work and the corresponding payments to be made to the contractor.

This contract, which must be fully executed by both the contractor and the borrower prior to closing, must require the contractor to

• be duly licensed (if required by applicable law);

• obtain all required insurance coverages (such as all-risk, public liability, workmen’s compensation, and automobile liability);

• complete the work in compliance with the contract and all applicable government regulations (such as building codes and zoning restrictions);

• obtain the necessary building permits (including a certificate of occupancy, upon completion of renovations, if required by local law); and

• provide for appropriate remedies for resolving disputes (including an agreement to indemnify the borrower for all property losses or damages caused by the contractor’s employees or subcontractors).

Fannie Mae has developed a model Renovation Contract (Form 3730) to document the renovation contract between the borrower and the contractor.

The lender must keep a copy of the fully executed renovation contract in the loan file.

HomeStyle Renovation mortgages may be subject to a variety of laws and regulations, based on the type of transaction or the types of lenders originating the mortgages. Therefore, when Fannie Mae’s model document is used, all appropriate, required changes must be made.

A renovation loan agreement is a written agreement between the borrower and the lender. This agreement must be fully executed by both the lender and the borrower at closing and dated the same date as the note. The agreement must

• state the original principal amount of the related promissory note payable to the lender;

• include the property address;

• state the terms and conditions of the loan prior to the completion of the improvements;

• state the events that constitute a borrower default, including, but not limited to, failing to keep any promise or to perform any obligation in the agreement;

• indicate the remedies available to the lender if the borrower defaults under the terms of either the renovation contract or other loan documents;

• require the contractor to have any license required by any government regulations, and to obtain and keep in force an all-risk insurance policy (with a physical loss form endorsement and a mortgagee’s loss payable clause) equal to 100% of the full replacement cost of the improvements, public liability insurance, workmen’s compensation insurance (as required by applicable state law), and automobile liability insurance;

• require that either the borrower or the contractor obtain (and keep in force) all work permits required by any government agency, and comply with all applicable laws or government regulations;

• require the borrower to

  • submit to the lender a title policy and assist the lender in obtaining the appraisal and a survey;

  • agree that all renovation work will be completed no later than 15 months from the date the loan is closed and in accordance with the terms of the renovation contract (subject to approved change orders);

  • permit the lender to make property inspections; and

  • pay all costs and expenses required to satisfy any conditions of the agreement (including costs overruns, the costs of change orders, and the costs of enforcement of the agreement in the event of default);

• state the terms and conditions under which the lender may extend the 15 month completion deadline if the renovation cannot be completed on time (due to extenuating circumstances outside of the borrower's control), including

  • limiting any extension to no later than 18 months after the loan closing; and

  • requiring any extension to be in writing and the borrower to not be in default under any of the terms of the loan documents or the renovation contract;

• include provisions related to

  • the time, manner, and method by which the lender disburses the loan proceeds;

  • conditions on how the disbursements may be used;

  • procedures on how to request a disbursement (including the proper format, information, and required signatories);

  • documentation required to support each request for disbursement (such as the title policy, any required lien waivers from all contractors, subcontractors, and suppliers) and any required inspection reports;

  • the number and amount of payments that the lender is to make to the borrower and/or the contractor; and

• obligate the borrower and the contractor to enter into a renovation contract for all labor and materials to renovate the improvements, and provide the lender with a copy of

  • that contract;

  • the applicable plans and specifications that fully describe all work to be performed;

  • the renovation budget (which provides a timetable for stages of completion and the schedule for disbursements for payment of amounts due);

  • a schedule of disbursements for payment of the renovation costs; and

  • the requirements for requesting (and obtaining approval of) change orders.

Fannie Mae has developed a model Renovation Loan Agreement (Form 3731) to document the renovation loan agreement between the borrower and the lender.

Because HomeStyle Renovation mortgages may be subject to a variety of laws and regulations based on the type of transaction or the type of lender originating the mortgages, a lender that uses Fannie Mae’s model documents must make all appropriate, required changes to them.

The fully executed renovation loan agreement is a custodial document. The lender must maintain a copy of the agreement in the loan file and send the original to the document custodian as part of the loan delivery package (see E-2-01, Required Custodial DocumentsE-2-01, Required Custodial Documents, for additional information).

Before a lender makes the final disbursement upon the completion of renovation, it must obtain a lien waiver from the contractor, all subcontractors, and suppliers or a clear title report that releases all contractor, subcontractor, and supplier liens. Fannie Mae’s model document—Lien Waiver (Form 3739)—may be used for this, provided the lender makes any changes to it that are required by applicable law.