202: Status of Construction

Generally, we require the improvements for the subject property to have been completed when the mortgage is delivered to us.  However, we do make some exceptions to this and, in such cases, an appraisal report should be developed in accordance with the following criteria:

•    For new or proposed construction, an appraisal may be based on either plans and specifications or an existing model home, if the lender obtains a certification of completion before it delivers the mortgage to us.  This certification should be completed by the appraiser, state that the improvements were completed in accordance with the requirements and conditions in the original appraisal report, and be accompanied by photographs of the completed improvements.  When the completion of certain items that are included as part of the sales contract -- such as landscaping, a driveway, or a sidewalk -- or other minor items that do not affect the ability to obtain an occupancy permit has to be postponed for some reason, the lender may deliver the mortgage before these postponed items are completed if it represents and warrants that the postponed improvements will be completed within 180 days after the date of the mortgage note.  The appraisal report must show both the cost of completing the postponed items and the "as completed" value of the property after completion of the postponed improvements, although no dollar-for-dollar adjustments should be made.  The cost of completing any minor improvements must not represent more that 2% of the "as completed" appraised value of the property.  - The lender must establish a "completion escrow" for the postponed improvements, by withholding from the purchase proceeds funds equal to 120% of the estimated cost for completing the improvements.  However, if the contractor or builder offers a guaranteed "fixed price" contract for completion of the improvements, the funds in the "completion escrow" only need to equal the full amount of the contract price.    - The lender and the borrower must enter into an escrow agreement that determines how the lender will manage and disburse funds from the escrow account.  Once a certificate of completion is obtained, the lender must release the final draw from the escrow account (which should include any funds in excess of the amount needed to pay for completion of the postponed items).  The final title report must not show any outstanding mechanic's liens or take any exceptions to the postponed improvements or the escrow agreement.  If the final title report is issued before the completion of the improvements, the lender must obtain an endorsement to the title policy that ensures the priority of our lien. 

•    For existing construction, an appraisal may be based on the "as is" condition of the property if minor conditions that do not affect the livability of the property exist -- such as minor deferred maintenance -- as long as the appraiser's opinion of value reflects the existence of these conditions.  The lender must review carefully the appraisal for a property appraised in an "as is" condition to assure that the property does not have any physical deficiencies or conditions that would affect its livability.  If there are none, the lender does not need to require minor repairs to be completed before it delivers the mortgage to us.  When there are incomplete items or conditions that do affect the livability of the property -- such as a partially completed addition or renovation -- or physical deficiencies that could affect the soundness or structural integrity of the improvements, the property must be appraised subject to completion of the specific alterations or repairs.  In such cases, the lender must obtain a certificate of completion from an appraiser before it delivers the mortgage to us.  The certification does not need to include photographs of the property unless those that accompanied the original appraisal report are no longer representative of the completed property.  

Generally, the original appraiser should complete any required certification of completion; however, the lender may use a substitute appraiser.  In such cases, the substitute appraiser must review the original appraisal and certify that the original appraiser's description of the property was accurate and the opinion of market value was reasonable on the date of the original appraisal report.  The lender should note in its files why the original appraiser was not used.