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D1-2-01, Renovation Mortgage Loans (02/09/2022)

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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-related improvements.

The servicer must...

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. Renovation work must be completed no later than 15 months from the mortgage loan closing date. The servicer is authorized to request an extension not to exceed 18 months from the mortgage loan closing date if

  • the borrower is not in default under any of the mortgage loan documents, including the renovation or construction contract; and
  • the renovation work cannot be completed on time because extenuating circumstances exist that are beyond borrower's control.

In the rare circumstance a renovation project is expected to exceed 15 months, the servicer must submit an extension request in Fannie Mae Loan Quality Connect (see  F-4-02, List of ContactsF-4-02, List of Contacts) and describe the circumstances contributing to the delay and determine potential remedies.


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 their 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 (excluding “Do-It-Yourself” repairs) is performed by licensed contractors and/or sub-contractors, unless contractor licensing is not applicable under state or local regulations for the specific work being completed.


Manage the release of funds to pay for the completed work. Property inspections are required to confirm that renovation work is completed timely and according to plan, prior to escrow draw requests being approved. See Administering Escrow Accounts for Renovation Mortgage Loans below for additional details.


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 a renovation escrow account, as applicable.

Types of funds held in a renovation escrow account Description

A Contingency Reserve

An amount of at least 10%, and up to 15% 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.

The following table lists the servicer’s responsibilities for administering renovation escrow accounts for renovation mortgage loans.

The servicer must...

Deposit all of the applicable renovation costs into an interest-bearing renovation escrow account at the time that the mortgage loan is delivered. 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


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

  If requested by the borrower, release an amount not to exceed 50% of total planned materials costs upon request, provided funds for materials were not released upon, or immediately following, loan closing.

Note: A portion of this initial draw may be used to pay for permits, architect fees, and design or planning expenses that were incurred during the initial planning phase of the project.


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

  • requested in accordance with the agreed upon schedule; and

  • an inspection has occurred to validate that all work is being completed in accordance with the renovation plans (including any changes to the renovation plans submitted to Fannie Mae via HomeStyle Change Order Request (Form 1200), or a similar Form.

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...

Obtain an Appraisal Update and/or Completion Report (Form 1004D) from a renovation consultant, architect, or appraiser to confirm that the renovation was completed in accordance with the plans and specifications.

Note: Form 1004D must be reviewed to confirm that all “subject to” items listed in the appraisal were completed.

  Obtain a certificate of occupancy, if required.
  Ensure that the appraisal on file accurately reflects the final scope of completed work.

Note: When improvements to the property were not completed to plan, this may require an updated appraisal to determine whether the changes affect the “as completed” value. The servicer must self-report any reduction in value to the HomeStyle Renovation Mailbox (see F-4-02, List of ContactsF-4-02, List of Contacts).


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 material men’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 B-2, Property Insurance Requirements B-2, Property Insurance Requirements and B-3, Flood Insurance Requirements 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.

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SVC-2022-01 February 9, 2022