What These Documents Do for Your HomeStyle Renovation Loan
When you get a HomeStyle Renovation loan, you're not just signing a mortgage. You're entering into a three-way agreement between you, your lender, and your contractor that governs how your renovation project gets funded and completed.
The renovation contract is your agreement with the contractor. It spells out exactly what work will be done, how much it costs, and when payments happen. Think of it as your project roadmap and your protection against scope creep or disputes.
The renovation loan agreement is between you and your lender. This document controls how and when your lender releases renovation funds. Your lender doesn't just hand over a lump sum at closing — they hold the renovation money in escrow and release it in stages as work gets completed.
Say you're renovating a kitchen for $50,000. Your contractor might get 10% at the start, 40% when demolition and rough work are done, 40% when cabinets and appliances are installed, and the final 10% when everything passes final inspection.
The Renovation Contract Requirements
Your renovation contract must be signed by both you and your contractor before you close on your loan. No exceptions. The lender won't fund the loan without this fully executed contract in hand.
The contract must itemize every piece of work your contractor will perform. General descriptions like "kitchen renovation" won't cut it. You need specifics: remove existing cabinets, install new electrical outlets, install quartz countertops, paint walls with Benjamin Moore paint in specified colors.
The contract must list all subcontractors and suppliers by name. If your general contractor plans to use ABC Plumbing for the rough-in work and XYZ Tile for the backsplash, those names go in the contract. This gives your lender visibility into who's actually doing the work.
Your contractor must agree to carry specific insurance coverages. All-risk insurance protects against property damage during construction. Public liability covers injuries to workers or visitors. Workers' compensation is required in most states. Automobile liability covers vehicles on your property.
The contract must include a detailed payment schedule tied to completion milestones. You can't just agree to pay half upfront and half when done. The schedule needs to match actual work stages: foundation, framing, electrical rough-in, drywall, finish work, final cleanup.
The Renovation Loan Agreement Details
This agreement between you and your lender sets the rules for how renovation funds get disbursed. The agreement date must match your loan closing date, even if you sign it earlier in the process.
The agreement requires your contractor to maintain insurance equal to 100% of the full replacement cost of the improvements. If you're adding a $100,000 addition, your contractor needs $100,000 in all-risk coverage with your lender named as loss payee.
You have 15 months from closing to complete all renovation work. This isn't negotiable in the standard agreement. If your contractor says the job will take 18 months, you need to find a different contractor or a different loan program.
Extensions to 18 months are possible but require written approval from your lender. You must not be in default on any loan terms, and the delay must be due to circumstances beyond your control. Weather delays might qualify. Contractor scheduling conflicts won't.
The agreement spells out exactly how you request fund disbursements. You can't just call your lender and ask for money. You need to submit proper documentation: invoices, lien waivers, inspection reports, photos of completed work.
Your lender will inspect the property before releasing funds. They're not just taking your word that the work is done correctly. They want to see that the electrical rough-in actually happened before they pay the electrician.
Required Documentation and Evidence
Your lender needs a copy of the fully executed renovation contract in the loan file. This isn't optional documentation — it's required for loan delivery to Fannie Mae.
The renovation loan agreement becomes a custodial document. Your lender keeps a copy and sends the original to their document custodian as part of the loan delivery package, just like they do with your promissory note.
You must provide your lender with detailed plans and specifications that describe all work to be performed. Rough sketches won't work. You need architectural drawings, material specifications, and detailed scope descriptions.
The renovation budget must include a timetable for completion stages and a disbursement schedule. Your lender needs to know when each phase should be done and how much money you'll need at each stage.
For each disbursement request, you'll need to provide invoices from contractors, lien waivers from everyone who worked on that phase, and any required inspection reports from local building departments.
Why These Rules Exist
Fannie Mae requires these detailed contracts and agreements because renovation loans carry more risk than standard mortgages. When you buy an existing home, the lender can see exactly what they're financing. With renovation loans, they're financing work that hasn't happened yet.
The 15-month completion deadline exists because construction loans are inherently risky. The longer a project drags on, the more likely something will go wrong. Contractors might abandon the job, costs might spiral out of control, or you might run out of money.
The insurance requirements protect everyone involved. If your contractor's work causes a fire that damages your neighbor's house, the liability insurance covers the claim. If materials get stolen from your job site, the all-risk coverage pays for replacement.
The detailed payment schedule prevents you from paying too much money upfront. Construction fraud often starts with contractors demanding large upfront payments and then disappearing. The milestone-based payment system ensures contractors only get paid for completed work.
Common Problems and Complications
The biggest mistake borrowers make is signing a renovation contract that doesn't meet Fannie Mae requirements. Your contractor might be great at construction but terrible at paperwork. Review the contract carefully before signing to make sure it includes all required elements.
Some contractors resist the insurance requirements because they increase project costs. Don't compromise on this. If your contractor won't carry the required coverage, find a different contractor. Your lender won't fund the loan without proper insurance documentation.
Change orders can complicate the process significantly. If you decide mid-project to upgrade your countertops or add a bathroom, you need written approval from your lender before proceeding. Unauthorized changes can jeopardize your loan.
Weather delays are common but not automatic grounds for extension. Document any delays carefully and communicate with your lender early. Don't wait until month 14 to mention that rain set you back three weeks.
Some borrowers underestimate the complexity of the disbursement process. You can't just submit receipts and expect immediate payment. Plan for inspection delays, documentation requirements, and processing time when scheduling contractor payments.
Working with Fannie Mae's Model Forms
Fannie Mae provides model forms for the renovation contract (Form 3730), renovation loan agreement (Form 3731), and lien waiver (Form 3739). These forms include all required language and provisions.
Your lender might modify these forms to comply with state law requirements. Different states have different rules about construction contracts, lien rights, and insurance requirements.
Don't assume the model forms work in every situation. If you're doing unusual work or your contractor has specific requirements, the forms might need additional modifications. Work with your lender and attorney to ensure all documents are properly customized.
The model forms are starting points, not final documents. Your lender should review them carefully and make any necessary changes before you sign. Using the wrong form or missing required modifications can cause problems during loan delivery.
References
For the official guidelines, see B5-3.2-06: HomeStyle Renovation: Renovation Contract, Renovation Loan Agreement, and Lien Waiver in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Fannie Mae Guideline Text
B5-3.2-06, HomeStyle Renovation: Renovation Contract, Renovation Loan Agreement, and Lien Waiver (12/11/2024)
The renovation contract must
itemize the specific work that the contractor agrees to perform for the borrower;
state the agreed-upon cost of the renovation;
identify all subcontractors and suppliers; and
include an itemized description that establishes the schedule for completing each stage of the work and the corresponding payments to be made to the contractor.
This contract, which must be fully executed by both the contractor and the borrower prior to closing, must require the contractor to
be duly licensed (if required by applicable law);
obtain all required insurance coverages (such as all-risk, public liability, workmen’s compensation, and automobile liability);
complete the work in compliance with the contract and all applicable government regulations (such as building codes and zoning restrictions);
obtain the necessary building permits (including a certificate of occupancy, upon completion of renovations, if required by local law); and
provide for appropriate remedies for resolving disputes (including an agreement to indemnify the borrower for all property losses or damages caused by the contractor’s employees or subcontractors).
Fannie Mae has developed a model Renovation Contract (Form 3730) to document the renovation contract between the borrower and the contractor.
The lender must keep a copy of the fully executed renovation contract in the loan file.
HomeStyle Renovation mortgages may be subject to a variety of laws and regulations, based on the type of transaction or the types of lenders originating the mortgages. Therefore, when Fannie Mae’s model document is used, all appropriate, required changes must be made.
Renovation Loan Agreement
A renovation loan agreement is a written agreement between the borrower and the lender. This agreement must be fully executed by both the lender and the borrower. Both parties may execute the agreement any time during the closing process, however, the agreement date must match the note date. The agreement must
state the original principal amount of the related promissory note payable to the lender;
include the property address;
state the terms and conditions of the loan prior to the completion of the improvements;
state the events that constitute a borrower default, including, but not limited to, failing to keep any promise or to perform any obligation in the agreement;
indicate the remedies available to the lender if the borrower defaults under the terms of either the renovation contract or other loan documents;
require the contractor to have any license required by any government regulations, and to obtain and keep in force an all-risk insurance policy (with a physical loss form endorsement and a mortgagee’s loss payable clause) equal to 100% of the full replacement cost of the improvements, public liability insurance, workmen’s compensation insurance (as required by applicable state law), and automobile liability insurance;
require that either the borrower or the contractor obtain (and keep in force) all work permits required by any government agency, and comply with all applicable laws or government regulations;
require the borrower to
submit to the lender a title policy and assist the lender in obtaining the appraisal and a survey;
agree that all renovation work will be completed no later than 15 months from the date the loan is closed and in accordance with the terms of the renovation contract (subject to approved change orders);
permit the lender to make property inspections; and
pay all costs and expenses required to satisfy any conditions of the agreement (including costs overruns, the costs of change orders, and the costs of enforcement of the agreement in the event of default);
state the terms and conditions under which the lender may extend the 15 month completion deadline if the renovation cannot be completed on time (due to extenuating circumstances outside of the borrower's control), including
limiting any extension to no later than 18 months after the loan closing; and
requiring any extension to be in writing and the borrower to not be in default under any of the terms of the loan documents or the renovation contract;
include provisions related to
the time, manner, and method by which the lender disburses the loan proceeds;
conditions on how the disbursements may be used;
procedures on how to request a disbursement (including the proper format, information, and required signatories);
documentation required to support each request for disbursement (such as the title policy, any required lien waivers from all contractors, subcontractors, and suppliers) and any required inspection reports;
the number and amount of payments that the lender is to make to the borrower and/or the contractor; and
obligate the borrower and the contractor to enter into a renovation contract for all labor and materials to renovate the improvements, and provide the lender with a copy of
that contract;
the applicable plans and specifications that fully describe all work to be performed;
the renovation budget (which provides a timetable for stages of completion and the schedule for disbursements for payment of amounts due);
a schedule of disbursements for payment of the renovation costs; and
the requirements for requesting (and obtaining approval of) change orders.
Fannie Mae has developed a model Renovation Loan Agreement (Form 3731) to document the renovation loan agreement between the borrower and the lender.
Because HomeStyle Renovation mortgages may be subject to a variety of laws and regulations based on the type of transaction or the type of lender originating the mortgages, a lender that uses Fannie Mae’s model documents must make all appropriate, required changes to them.
The fully executed renovation loan agreement is a custodial document. The lender must maintain a copy of the agreement in the loan file and send the original to the document custodian as part of the loan delivery package (see E-2-01, Required Custodial DocumentsE-2-01, Required Custodial Documents, for additional information).
Lien Waiver
Before a lender makes the final disbursement upon the completion of renovation, it must obtain a lien waiver from the contractor, all subcontractors, and suppliers or a clear title report that releases all contractor, subcontractor, and supplier liens. Fannie Mae’s model document—Lien Waiver (Form 3739)—may be used for this, provided the lender makes any changes to it that are required by applicable law.
