D1-2-01: Renovation Mortgage Loans (11/12/2014)

Exercise all approval and oversight responsibilities that are customary to ensure that clear title to the property is maintained.

Administer the renovation escrow account, as described in greater detail below.

Ensure that the renovation work is completed in a timely manner.

Ensure that the renovation work is completed in accordance with the plans, specifications, and the contractor’s estimated bids. The three key documents used to document the terms of the renovation work are as follows:

• The plans and specifications, which 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 renovation or construction contract between the borrower and the contractor which sets out the specific work the contractor agrees to perform, states the agreed-upon costs of the renovation work, identifies all subcontractors and suppliers, and includes an itemized description that establishes the schedule for completing each stage of the work and the corresponding payments to the contractor. It also provides the contractor’s agreement to complete the work in compliance with the contract and all applicable government regulations (such as building codes and zoning restrictions) and to obtain the necessary building permits (including a certificate of occupancy, if required).

• The renovation or construction mortgage loan agreement between the borrower and the lender which states the terms and conditions of the mortgage loan prior to the completion of the work. It also includes the details about the timetable for completing the renovation or construction work; details about the use of proceeds of the renovation mortgage loan (and any amount the borrower has to provide from his or her own funds), the method and timetable for payment of the funds to the contractor and the borrower; procedures for documenting requests for disbursements, establishing and maintaining contingency reserves, and processing change orders; and details about conditions that apply to repayment of the mortgage loan, completion requirements, and resolution of disputes.

Require the borrower to submit a HomeStyle Change Order Request (Form 1200), or a similar form, to provide a detailed description of the change(s), the cost of the change(s), and the estimated completion date(s) before approving any change a borrower wants to make to the original plans and specifications.

Ensure that all renovation work is performed by licensed contractors.

Manage the release of funds to pay for the completed work.

Refer to the HUD guidelines for specific requirements for government-insured renovation mortgage loans, if applicable.

A Contingency Reserve

An amount equal to 10% of the total costs for the renovation work, which the servicer must only release to cover required, necessary, and unforeseen repairs or deficiencies that are discovered during the renovation.

Construction Related Costs

Documented charges that may be considered part of the renovation work include, but are not limited to, the following:

• property inspection fees,

• fees for the title update,

• architectural and engineering fees,

• independent consultant fees,

• costs for required permits,

• fees for review of renovation plans,

• appraisal fees, and

• fees charged for processing construction draws.

Mortgage Loan Payments

If the property is a principal residence that cannot be occupied during the renovation period, the servicer must use this amount to fund mortgage loan payments that become due during the renovation construction period.

Note: The servicer must ensure that this represents only those payments that come due during the period that the property cannot be occupied and that the amount funded does not exceed six full mortgage loan payments of PITIA.

Deposit all of the applicable renovation costs into an interest-bearing renovation escrow account at the time that the mortgage loan closes. The servicer may commingle the renovation escrow accounts for different borrowers in the same custodial account.

Note: If there is an increase in costs during the renovation period, the borrower or the servicer must fund the amount of the increase. The servicer must ensure that the borrower obtains the additional funds in a manner that will not affect the priority of Fannie Mae’s lien.

Ensure that the renovation escrow account

• is a custodial account that satisfies Fannie Mae’s criteria for custodial accounts and depositories as outlined in A4-1-02, Establishing Custodial Bank Accounts, and

• includes all required funds previously described to pay for the renovation.

Pay or credit all interest earned on the renovation escrow account, less any administrative expenses involved in maintaining the account, to the borrower.

Release funds from the renovation escrow account to the contractor and the borrower only when

• any renovation work has been completed, and in accordance with the agreed upon schedule; and

• after receipt of a specific request.

Obtain a HomeStyle Completion Certificate (Form 1036), or a similar certification of completion, from a renovation consultant, architect, or appraiser to confirm that the renovation was completed in accordance with the plans and specifications.

Obtain an endorsement to the title insurance policy, concurrent with the date of the last disbursement of funds, to extend its effective date through the date the renovation was completed, ensuring the continuance of Fannie Mae’s first-lien priority.

Note: When the property is in a state in which contractors’, subcontractors’, or materialmen’s liens have priority over mortgage liens, the servicer must obtain all necessary lien releases or take any other action that may be required to ensure that the title to the property is clear of all liens and encumbrances.

Obtain a certification regarding the property insurance to confirm that the coverage has been increased, if necessary, to comply with Fannie Mae’s standard property and flood insurance requirements. See Chapter B-2, Property Insurance Requirements and Chapter B-3, Flood Insurance Requirements for Fannie Mae’s applicable property insurance coverage requirements.

Use all funds remaining in the renovation escrow account that were not deposited separately by the borrowers to reduce the UPB of the mortgage loan. However, in some cases, unused contingency funds can be used to make additional improvements or repairs to the property.