Chapter 3

Moderate Rehabilitation Mortgage Loans

Section 301

Description

Requirements

A Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work. Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents or a mortgage debt obligation with a Fannie Mae credit enhancement. is secured by a PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). that will undergo at least $8,000 per unit of Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. .  This Chapter does not apply to PropertiesPropertiesMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). with a lesser amount of rehabilitation work.

Product Description
Minimum Per Unit Cost for Rehabilitation Work

$8,000 per unit:

 

  • based on the total number of residential units at the PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). , not the number of units being rehabilitated; and
  • includes the estimated cost of all Completion/RepairsCompletion/RepairsImmediate Repairs identified by the Property Condition Assessment and required by the Lender to be included in the Completion/Repair Agreement (or a Certificate of Borrower, if applicable). identified in the PCAPCAAssessment of the current physical condition and historical operation of the Property. (or MBAMBAMortgage Bankers Association Standard Inspection Form, if applicable).
Rehabilitation Timing

The Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. must be completed as follows:

 

  • items identified as Completion/RepairsCompletion/RepairsImmediate Repairs identified by the Property Condition Assessment and required by the Lender to be included in the Completion/Repair Agreement (or a Certificate of Borrower, if applicable). in the PCAPCAAssessment of the current physical condition and historical operation of the Property. , per Part II, Chapter 4: Inspections and Reserves, Section 403: Completion/Repairs;
  • Efficiency MeasuresEfficiency MeasuresEnergy- and water-efficiency measures that the Borrower agrees to implement, and which project a reduction in the Property’s annual energy or water consumption. qualifying for a Green Rewards Mortgage LoanGreen Rewards Mortgage LoanMortgage Loan secured by a Property where the Borrower agrees to undertake 1 or more Energy- and Water-Efficiency Measures that comply with Part III: Products and Features, Section 403. , per Part III, Chapter 4: Green Mortgage Loans;
  • if the Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work.  Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents or a mortgage debt obligation with a Fannie Mae credit enhancement. meets the requirements for using the Appraised ValueAppraised ValueAppraiser’s opinion of the market value of the Property documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted by the Guide. on an “as completed” basis (per Part II, Chapter 2: Valuation and Income, Section 201: Market and Valuation), then the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. may be completed after the 12-month period, but not later than 36 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. ; and
  • all other Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. , in a timely manner, but not later than 36 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .
Completion/Repair Escrows For Completion/RepairsCompletion/RepairsImmediate Repairs identified by the Property Condition Assessment and required by the Lender to be included in the Completion/Repair Agreement (or a Certificate of Borrower, if applicable). identified in a PCAPCAAssessment of the current physical condition and historical operation of the Property. , if you require full or partial funding of a Completion/Repair EscrowCompletion/Repair EscrowCustodial Account established by the Lender and initially funded by an escrow deposit from the Borrower on the Mortgage Loan Origination Date to complete Completion/Repairs or other capital improvements at the Property. , any higher funding amount you require above the estimated cost of Completion/RepairsCompletion/RepairsImmediate Repairs identified by the Property Condition Assessment and required by the Lender to be included in the Completion/Repair Agreement (or a Certificate of Borrower, if applicable). must be funded.
Mezzanine Financing If the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. is funded through Mezzanine FinancingMezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. , you must also comply with Part III, Chapter 16: Mezzanine Financing and Preferred Equity.
Section 302

Underwriting

Requirements

For all Moderate Rehabilitation Mortgage Loans...

Rent or Income Restrictions

For Multifamily Affordable HousingMultifamily Affordable HousingProperty encumbered by a regulatory agreement, land use restriction agreement, extended use agreement, or similar restriction that limits rents that can be charged to tenants, or imposes income limits on tenants. PropertiesPropertiesMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). , you must ensure that the rents expected to be charged after Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. is completed are consistent with any rent or income restrictions.

Tenants, Guests, and Employees

You must identify and mitigate any risks that the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. may have during the renovation period on

 

  • the health and safety of tenants, guests, or employees at any time, and
  • tenant displacement, and consider a relocation plan to minimize the effects of the displacement.

Guidance

For all Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work. Mortgage LoansMortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents or a mortgage debt obligation with a Fannie Mae credit enhancement. , you should consider the following questions about the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. :

  • Are at least 60% of the budgeted improvements for interior unit upgrades?
  • Are the projected cost estimates reasonable and sufficient to complete the entire scope of work?
  • Does the budget, including the sources, uses, and schedule, provide adequate capital availability during the term of the work?
  • Are construction contracts guaranteed maximum price contracts that specify a completion date?
  • Given the scope of work,is a Completion/Repair AgreementCompletion/Repair AgreementThe 4000 series Completion/Repair Security Agreement (Form 4505), or other agreement approved by Fannie Mae, that evidences the:  Borrower’s agreement to perform Completion/Repairs and other identified capital improvements; terms for funding the repairs, maintenance, or capital items; and … or Rehabilitation Reserve AgreementRehabilitation Reserve AgreementBorrower’s agreement to undertake identified Rehabilitation Work, the terms for funding the Rehabilitation Work, and the disbursement of funds from the Rehabilitation Reserve Account (e.g., Form 6222.Mod, Form 6222.Sub, or Form 4523). (Form 6222.Mod), including a fully-funded Completion/Repair EscrowCompletion/Repair EscrowCustodial Account established by the Lender and initially funded by an escrow deposit from the Borrower on the Mortgage Loan Origination Date to complete Completion/Repairs or other capital improvements at the Property. or Rehabilitation Reserve AccountRehabilitation Reserve AccountCustodial Account established by the Lender and funded by deposits from the Borrower per the Rehabilitation Reserve Agreement to fund the Rehabilitation Work. , appropriate?
  • Is the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). ’s net worth and liquidity adequate to fund any unexpected cost overruns or operating deficits?
  • Does the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). have demonstrated experience with the scope of work in the same or similar real estate markets?
  • Does the BorrowerBorrowerPerson who is the obligor per the Note. have sufficient economic incentive to complete the entire scope of work, including the feasibility of achieving projected post-rehabilitation rents sufficient to meet the target effective gross income?
  • Should a Key PrincipalKey PrincipalAny Person who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and who may be required to provide a Guaranty. execute a Completion Guaranty (Form 6018) that covers a portion or the entire scope of the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. ?
  • Should additional collateral (e.g., deposits into the Rehabilitation Reserve AccountRehabilitation Reserve AccountCustodial Account established by the Lender and funded by deposits from the Borrower per the Rehabilitation Reserve Agreement to fund the Rehabilitation Work. that are greater than the budget for the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. , operating deficit reserve, Letter of CreditLetter of CreditLetter of Credit approved by Fannie Mae per Part I, Chapter 2: Mortgage Loan, Section 204: Letters of Credit. , etc.) be required?
Section 303

Rehabilitation Work Costing More than $20,000 Per Unit
303.01

Rehabilitation Work Evaluation Report

Requirements

If the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. will cost more than $20,000 per unit and includes structural additions or modifications, then in addition to the other requirements in this Chapter, you must obtain a rehabilitation work evaluation report from either the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. or a licensed architect or engineer.

This rehabilitation work evaluation report must include:

  • a review and evaluation of the PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). ;
  • the scope of Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. ; and
  • all significant construction contracts related to the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. .

The report must also address, and you must evaluate, the following:

  • Is the planned Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. structurally sound and physically feasible?
  • Is the estimated cost of the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. reasonable?
  • Will the work be completed within the BorrowerBorrowerPerson who is the obligor per the Note. ’s scheduled time frame, but not later than 36 months after the anticipated Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. ?
  • Will the work comply with all zoning, building, and fire code regulations?
  • Is there any additional work that is not already planned but that should be undertaken?
303.02

Rehabilitation Reserve Agreement

Requirements

You must ensure that the BorrowerBorrowerPerson who is the obligor per the Note. :

  • Executes a Modifications to Multifamily Loan and Security Agreement (Rehabilitation Reserve – Moderate Rehabilitation) (Form 6222.Mod) that identifies the planned scope of the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. on the Rehabilitation Work Schedule, including
    • all of the Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. items,
    • estimated costs,
    • allowance for cost overruns, and
    • completion dates.
  • Completes a budget for the planned Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. .
  • Funds a Rehabilitation Reserve AccountRehabilitation Reserve AccountCustodial Account established by the Lender and funded by deposits from the Borrower per the Rehabilitation Reserve Agreement to fund the Rehabilitation Work. with the:
    • entire budgeted amount (or a higher amount that you require) for all Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. that is not identified as Completion/RepairsCompletion/RepairsImmediate Repairs identified by the Property Condition Assessment and required by the Lender to be included in the Completion/Repair Agreement (or a Certificate of Borrower, if applicable). by the PCAPCAAssessment of the current physical condition and historical operation of the Property. ; and
    • estimated cost (or a higher amount that you require per Part II, Chapter 4: Inspections and Reserves, Section 403: Completion/Repairs) for Completion/RepairsCompletion/RepairsImmediate Repairs identified by the Property Condition Assessment and required by the Lender to be included in the Completion/Repair Agreement (or a Certificate of Borrower, if applicable). .
Section 304

Supplemental Mortgage Loans

Requirements

Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work. Supplemental Mortgage LoansSupplemental Mortgage LoansMortgage Loan purchased by Fannie Mae that is subordinated to, and has a Mortgage Loan Origination Date after, the Senior Mortgage Loan that is also owned by Fannie Mae. must comply with Part III, Chapter 14: Supplemental Mortgage Loans, except as modified by this Section.

Supplemental Mortgage Loans

Origination Date
  • Must be originated within 36 months of the Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work. Mortgage Loan's Origination DateMortgage Loan's Origination DateDate you fund a Mortgage Loan to the Borrower. .
  • Require no minimum period to elapse provided the minimum Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. is completed at the PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). after origination of the Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work. Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents or a mortgage debt obligation with a Fannie Mae credit enhancement. .

Loan Term

Must be coterminous with the Moderate RehabilitationModerate RehabilitationProperty that will undergo at least $8,000 per unit of Rehabilitation Work. Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents or a mortgage debt obligation with a Fannie Mae credit enhancement. .

Completed Rehabilitation Work
  • Completed Rehabilitation WorkRehabilitation WorkAggregate repairs, replacements, or improvements (including all Completion/Repairs) required to be performed and completed within a specified time period after the Mortgage Loan Origination Date for a Moderate Rehabilitation Property. or other repairs, replacements, or improvements must comply with this Chapter.
  • You must document evidence of the
    • qualifying scope of work completed at the PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). , and
    • cost of work and improvements to the PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). verified by you.

Site inspection

You must perform a site inspection if the qualifying work was not completed pursuant to a Completion/Repair AgreementCompletion/Repair AgreementThe 4000 series Completion/Repair Security Agreement (Form 4505), or other agreement approved by Fannie Mae, that evidences the:  Borrower’s agreement to perform Completion/Repairs and other identified capital improvements; terms for funding the repairs, maintenance, or capital items; and … or a Rehabilitation Reserve AgreementRehabilitation Reserve AgreementBorrower’s agreement to undertake identified Rehabilitation Work, the terms for funding the Rehabilitation Work, and the disbursement of funds from the Rehabilitation Reserve Account (e.g., Form 6222.Mod, Form 6222.Sub, or Form 4523). .  This requirement may be satisfied if the most recent asset management site inspection was conducted after the required work was completed at the PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). .

Rate Lock

Are not eligible for the Streamlined Rate Lock option.