Servicer’s Responsibilities for Renovation Mortgage Loans
The following table lists the servicer’s responsibilities when Fannie Mae purchases a renovation mortgage loan before completion of the home improvements or repair work.
For purposes of this Servicing Guide, renovation includes energy improvements.
✓ | The servicer must... |
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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:
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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. |
If the servicer’s action or lack of action affects Fannie Mae’s ability to acquire clear title to the property, Fannie Mae may require the servicer to repurchase the mortgage loan.
Administering Escrow Accounts for Renovation Mortgage Loans
The following table describes the funds that the servicer must ensure are included in the renovation escrow account, as applicable.
Types of funds held in a renovation escrow account | Description |
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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:
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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. |
The following table lists the servicer’s responsibilities for administering renovation escrow accounts for renovation mortgage loans.
✓ | The servicer must... |
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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
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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
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Servicer’s Responsibilities upon Completion of Renovation Work
The following table provides the servicer’s responsibilities upon completion of the renovation work.
✓ | Following completion of the renovation work, the servicer must... |
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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. |
Additional Information: https://www.fanniemae.com/content/guide/servicing/d1/2/01.html