Selling Guide

Published June 3, 2020

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B5-3.2-06, HomeStyle Renovation: Renovation Contract, Renovation Loan Agreement, and Lien Waiver (08/07/2018)


This topic contains information on HomeStyle Renovation documents, including:

Renovation Contract

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,

  • 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 executed by both the contractor and the borrower, 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);

  • 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.

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.

Renovation Loan Agreement

A renovation loan agreement is a written agreement between the borrower and the lender that:

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

  • states the events that constitute a borrower default and indicates the remedies available to the lender if the borrower defaults under the terms of either the renovation contract or other loan documents;

  • requires 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;

  • requires 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;

  • requires the borrower to:

    • submit to the lender a title policy, an appraisal (if applicable), and a survey;

    • 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);

  • includes provisions for extending the completion date if the renovation cannot be completed on time as the result of a tornado, flood, or fire, and states the terms under which the lender may grant such extensions;

  • includes provisions related to:

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

    • conditions on how the advances may be used;

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

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

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

  • obligates the borrower and the contractor to enter into a renovation agreement 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 advances for payment of amounts due);

    • a schedule of advances 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.

Lien Waiver

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.

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