B5-3.2-04, HomeStyle Renovation Mortgages: Costs and Escrow Accounts (08/07/2018)

Owned by Marsha Freeman
Last updated: Nov 17, 2018 by Kacey Olson (Unlicensed)
4 min read

© Fannie Mae Single Family Selling Guide

Costs and Escrow Accounts

The costs of the renovations will be based on the plans and specifications for the work and on the contractor’s bids for all of the work requested by the borrower. The renovation costs may include a contingency reserve, renovation-related costs, and an escrow for mortgage payments that come due during the renovation period, if the borrower is unable to occupy the property during the renovation.

Contingency Reserve

The contingency reserve should cover all renovation-related costs including labor, materials, fees, permits, plans and specifications, inspection costs, and other expenses related to the renovation.

A contingency reserve is not required for a mortgage secured by a one-unit property, however the lender may choose to establish one. A contingency reserve equal to 10% of the total costs of the repairs and renovation work must be established and funded for a mortgage that is secured by a two- to four-unit property to cover required unforeseen repairs or deficiencies that are discovered during the renovation. The lender may increase the contingency reserve to 15% if it determines the higher reserve is appropriate given the scope and scale of the renovation.

The contingency reserve may be considered as part of the total renovation costs or the borrower may fund it separately. It may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation. Unused contingency funds, unless they were received directly from the borrower, must be used to reduce the outstanding balance of the renovation loan after all of the renovation work has been completed and the certification of completion has been obtained.

However, a borrower may use the remaining contingency reserve funds for making additional improvements or repairs to the property, if the lender:

  • warrants that the work scheduled and described in the plans and specifications was completed and the contingency reserve funds have already been reduced by any cost overruns; and
  • ensures that
    • the contingency reserve funds that are to be used for additional improvements or repairs are actually used to improve the real property,the improvements or repairs are documented with paid receipts from the borrower’s own funds, andinspections of the additional work or installations are completed by the appraiser who prepared the “as completed” value appraisal report.

Escrowing Initial Mortgage Payments

At the borrower’s request, up to six mortgage payments (PITIA) that will become due during the renovation period may be included as part of the total renovation costs for a principal residence property if the property cannot be occupied during the renovation period. The lender, servicer, or its agent must hold the funds in a renovation escrow account, and only apply them to payments that come due during the period in which the property cannot be occupied.


Note: The lender may set up a separate escrow account for the mortgage payments in lieu of including the funds in the renovation escrow account.


Renovation Escrow Account

The renovation costs (less any draws made at closing), the contingency reserve, mortgage payments (if applicable), and monies that the borrower provides from his or her own funds, must be deposited into an escrow account for the benefit of the borrower. The renovation escrow account must meet the requirements shown in the following table.

✓Renovation Escrow Account Requirements

The account must meet the requirements of and be administered in accordance with the requirements in the Servicing Guide, D1-2-01, Renovation Mortgage Loans.

The funds must be used to complete the repair and renovation work and, if applicable, make any mortgage payments that come due during the renovation period.


Note: The lender must ensure that the funds held for mortgage payments are used only for that purpose and are not used for renovations or any other reason.



The lender, or its agent, is responsible for administering this account and ensuring the repairs and renovations are completed in a timely manner and in accordance with the plans, specifications, and contractor estimated bids.

The lender must release funds from this account only when any given renovation work has been completed, and then only in accordance with the agreed-upon schedule and after receipt of a specific request.

  • Renovation funds may only be disbursed using the following processes: a check issued jointly to the borrower and the contractor; or
  • a wire transfer to the contractor after the lender has obtained written consent from the borrower to release the funds to the contractor. The written consent must be received prior to each disbursement. It must specify the borrower’s name, property address, amount of funds to be disbursed, contractor to which the funds are to be disbursed, and date of the consent.

After renovations are complete, all funds remaining in this account, including any mortgage payment reserves, may be used to either:
  • reduce the unpaid principal balance of the loan (unless they represent funds deposited separately by the borrower), or
  • to make additional improvements or repairs to the property.

Note: The lender may fund up to 50% of the planned materials cost at closing with an initial materials draw. A portion of this draw may be used to pay for permits, architect fees, and design or planning expenses that were incurred during the initial part of the project.The lender must obtain periodic inspections to confirm the work is being completed as planned prior to the issuance of additional escrow draws.

Should there be an increase in costs during the renovation period, the borrower, or the lender, must fund the amount of the increase. The lender may not increase the loan amount to offset any increase in costs. The lender must ensure that the additional funds are obtained in a manner that will not affect the priority of Fannie Mae’s lien.