B5-3.2-03, HomeStyle Renovation Mortgages: Collateral Considerations (02/02/2022)

The appraisal report for a HomeStyle Renovation mortgage must provide an “as completed” appraised value that estimates the value of the property after completion of the renovation work. (See B5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower EligibilityB5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower Eligibility, for requirements pertaining to the cost of the renovations as a percentage of the appraised value. See also Unplanned Changes in Scope or Incomplete Work later in this topic.

The lender must review an energy report if a HomeStyle Renovation loan is being combined with a HomeStyle Energy loan. See B5-3.3-01, HomeStyle Energy for Improvements on Existing PropertiesB5-3.3-01, HomeStyle Energy for Improvements on Existing Properties, for additional information concerning the requirements related to the energy report.

Note: Energy improvements may be financed without obtaining an energy report if the lender is not utilizing the additional flexibilities under the HomeStyle Energy program.

All renovation work must be performed by a licensed contractor or subcontractor, unless contractor licensing is not applicable under state or local law for the specific trade or type of renovations being performed.

The borrower must choose the contractor to perform the needed renovation, subject to the lender’s determination that the contractor is

• qualified and experienced,

• has all appropriate credentials required by the state,

• is financially able to perform the duties necessary to complete the renovation work in a timely manner, and

• agrees to indemnify the borrower for all property losses or damages caused by its employees or subcontractors

The lender may not choose the contractor or refer the borrower to any one specific contractor. However, the lender may require the borrower to obtain a completed Contractor Profile Report (Form 1202) from the contractor that is selected to ensure that the lender has sufficient information available to make a determination about the contractor’s qualifications.

The borrower may also complete repairs under the “Do It Yourself” option described in B5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower EligibilityB5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower Eligibility.

The plans and specifications must be prepared by a registered, licensed, or certified general contractor, renovation consultant, or architect. The plans and specifications should fully describe all of the work to be done and provide an indication of when various jobs or stages of completion will be scheduled (including both the start and completion dates).

The lender must use the plans and specifications to document and evaluate the quantity, quality, and cost of the renovation work that is to be done and to determine the amount of financing that will be available. These plans and specifications also must be used by the appraiser in the development of their opinion of the “as completed” value of the property.

Before approving any change a borrower wants to make to the original plans and specifications, the lender must require the borrower to submit a HomeStyle Change Order Request (Form 1200) or a substantially similar document, that provides a detailed description of

• the changes,

• the cost of the changes, and

• the estimated completion date(s).

Lenders must work with borrowers and contractors to ensure renovations are completed as planned, within an acceptable timeframe. If unforeseen circumstances occur during the renovation work, such as property damage from a natural or manmade disaster, or a life altering event such as death or divorce, the lender must take additional steps to evaluate the materiality of the change to any renovations in progress.

The lender must obtain an updated appraisal to determine whether the changes will impact the “as completed” value of the property, and must self-report any change in value by entering it into Loan Quality Connect. In some cases, the lender may be responsible for additional mortgage insurance or LLPAs. When the new LTV exceeds Fannie Mae’s eligibility criteria, or the changes result in a home that does not meet Fannie Mae’s general property standards and appraisal requirements, the lender may be required to repurchase the loan.