Not many people realize that their house needs to be 100% complete to get financing on it. I see situations more than you would think where a property is not 100% complete and we run into troubles getting the financing approved. I know it sounds silly that settlement on a $300,000 mortgage on a home valued at $400,000 would be held up because the property doesn’t have any railings on one stairwell, but that is the case. And the reason for this, as I have cited numerous times on this blog, is that the Fannie Mae rules on property condition (as well as everything else) are rigid, and allow for no leeway…at all. I mean not at all. I will give you a few specific examples.
I recently had a purchase loan where the client was borrowing $417,000 on an $865,000 purchase price. That is right, they were putting over 50% down. You would think that there would be some latitude on the condition of the property, but that is not the case. This property was a recent renovation by a developer who did a very nice job, although, the developer ran out of time, and a day or two before settlement there were a couple of flower boxes and areas where shrubbery was going to go in that were not complete. The underwriter would not let the loan go to closing because the landscaping was not 100% complete, and that is a Fannie Mae rule that nobody will work around. Again, this was a 50% down payment loan, with an excellent credit score, and everything else in the loan was in order. No leeway, no latitude, no exceptions. The developer had to scramble and plant the shrubs and flowers and we did manage to go to settlement on time, but it was a last-minute fire drill when it should not have been one. The developer even asked if we could hold back some of his profits at settlement and put some money aside in an escrow account to finish the landscaping after settlement. And Fannie Mae no longer allows escrow accounts for completion of any items. Literally nothing can be escrowed, Fannie Mae wants 100% of the work completed.
I also recently had a call on a potential refinance, he wanted to do a cash out refinance and get some cash out to help him pay off and finish some renovations he was doing. But the potential client told me that he had recently started these renovations, and wondered if that would be a problem. He told me, “The 2nd phase of demo has begun, and the staircases currently have no railing. One wall has been removed to open up the floor plan on the 1st floor. The ground level flooded a few years back so that hardwood floor warped – I removed it exposing the concrete slab below. I’d be willing to do a walk-thru with an appraiser or you to get an initial thought regarding whether it would be worth our efforts at this point. Let me know your thoughts.”
Of course I already knew the answer, and so do you. Fannie Mae will make no allowances for anything that is incomplete, let alone a missing stair railing, open walls, or a floor that has no floor covering. So unfortunately I had to tell the client to finish the renovation on his own with his own money, and then we could look at doing the refinance after the property was 100% complete.
So be aware, there will be no exceptions, not for the least little incomplete item no matter how inconsequential. A property should be 100% complete to get a mortgage on it, at least through the traditional channels of Fannie Mae, Freddie Mac, FHA and VA. And of course we all know that those traditional channels are the only game in town at this point.