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

                                                                                                     Appraisals

                                                              (Any appraisal report form including Hybrid and Desktop)

Professionally prepared inspection report

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

Professionally prepared inspection report

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

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."

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.

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 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.

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.

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.