Selling Guide

Published December 16, 2020

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What is required when a completion escrow is needed for postponed improvements?

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.

 For additional information, see B4-1.2-03, Requirements for Postponed Improvements.

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