Chapter 4

Lease Audits, Inspections, and Reserves

Section 401	Lease Audit

401.01	Generally

Requirements

Before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , you must:

complete a thorough lease audit to reconcile the rent roll with the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). signed leases; and
comply with the following table.

Lease Audit Review
For Properties with...	You must review at least...
5 - 9 units	all available leases.
10 - 100 units	the greater of 5 units or 10% of all leases.
101 - 300 units	10% of all leases.
301 - 900 units	40 leases.
901+ units	50 leases.

When auditing the leases, you must:

analyze the entire tenant file, including, whenever available
- identification records,
- verification of employment and income, and
- credit verifications;
audit leases for all inspected units;
include new and recently renewed leases to verify rent trends;
increase the number of leases reviewed if you find
- material discrepancies, or
- lack of adequate documentation in the files;
document your results in a lease audit form; and
summarize the results in your Transaction Approval Memo, including any documents that were unavailable for review, and why.

If the management company engages a third party to review and approve the tenant qualification documents, you must:

review the documents; and
explain your rationale in the Transaction Approval Memo if any documents are unavailable for review (e.g., a national tenant qualification firm completed and documented the review, etc.).

401.02	Lease Audit Notification

Requirements

Before the inspection, you must email the BorrowerBorrowerPerson who is the obligor per the Note. and management company:

specifying the minimum lease audit requirements; and
requesting full records access to ensure your ability to perform additional due diligence for any identified critical issues.

401.03	Validating Rent Collections, Bad Debt, and Secondary Income

Requirements

When validating rent collections, you must:

review 1 of the following:
- a cash ledger;
- receipts journal;
- at least 3 months of bank statements confirming the rent deposits; or
- similar documents;
meet with the site manager to obtain and discuss:
- an accounts receivable report; or
- past rent due report;
compile a lease audit form or record to validate the lease terms against the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). rent roll;
include your lease audit form with your underwriting documents delivered to DocWayDocWayBusiness-to-business electronic documentation delivery application, or any successor system. ; and
document your findings in the Transaction Approval Memo.

You must use the AppraisalAppraisalWritten statement independently and impartially prepared by a qualified Appraiser stating an opinion of the Property's market value as of a specific date, and supported by the presentation and analysis of relevant market information. , other comparable PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). information, or third-party data sources to validate secondary income related to:

ratio utility billing system (RUBS);
cable;
laundry;
parking; or
any other tenant income.

Guidance

You should confirm the management company uses:

acceptable practices for day-to-day operations; and
industry-standard software systems to generate detailed reports.

You may obtain sample management company reports, such as

rent rolls,
operating statements,
operating budgets,
capital improvement plans, and
marketing.

Section 402	Site Inspections

402.01	Physical Inspections

402.01A	Generally

Requirements

You must:

before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , ensure your qualified employee per Part V, Chapter 5: Surveillance, Section 502.05A: Qualifications:
- performs a physical PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). inspection;
- confirms the status of all units selected for inspection below (e.g., whether occupied or vacant), per a current rent roll;
- completes the MBAMBAMortgage Bankers Association Standard Inspection Form using their own photos; and
- compares the consistency of their photos with the
  - PCAPCAAssessment of the Property's physical condition and historical operation. , and
  - AppraisalAppraisalWritten statement independently and impartially prepared by a qualified Appraiser stating an opinion of the Property's market value as of a specific date, and supported by the presentation and analysis of relevant market information. ; and
not DeliverDeliverSubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. any 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. secured by a PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). with an overall condition rating of 4 or 5 per the Comprehensive Assessment tab of the MBAMBAMortgage Bankers Association Standard Inspection Form.

402.01B	Selecting Units

Requirements

To determine the minimum number of units to inspect, you must:

use the Physical Property Inspection table; and
increase the number by 25% if some units are not accessible.

Physical Property Inspection
For Properties with...	You must inspect at least...
5 - 9 units	all available units.
10 - 100 units	the greater of 5 units or 10% of all units.
101 - 300 units	10% of all units.
301 - 900 units	40 units.
901+ units	50 units.

When choosing which units to inspect, you must:

randomly select floors and units;
include:
- all unit types and as many different floors as possible;
- units from all buildings;
- all units vacant for more than 90 days, unless the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). is a Near Stabilized PropertyNear Stabilized PropertyNewly constructed or recently rehabilitated Property, with all construction or rehabilitation complete, which is expected to achieve Stabilized Residential Occupancy and the applicable required Underwritten Debt Service Coverage Ratio within 120 days after the Mortgage Loan Origination Date. ;
- all down units (i.e., units that cannot currently be rented in the normal course of business); and
- any additional units you deem appropriate based on
  - PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). type,
  - other factors, or
  - the results of your initial inspection.

402.01C	Inspection Notification

Reqiurements

Before the inspection, you must email the BorrowerBorrowerPerson who is the obligor per the Note. and management company to:

request access to units selected for inspection; and
notify them that, if any selected units are unavailable, an additional 25% of the units required to be sampled per Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 402.01B: Selecting Units must be inspected (e.g., for a 500 unit building requiring 40 units to be inspected, if selected units are unavailable, an additional 10 units must be inspected).

402.02	Capital Item Replacements

Requirements

For replacement of capital items, you must:

for refinances, obtain:
- an itemized list of capital items completed within the last 24 months; and
- for any capital item replacements you cannot independently confirm were completed, the invoices showing the associated actual costs;
use best efforts to obtain the PCA Consultant’sPCA Consultant’sIndividual or firm conducting a PCA and preparing a PCA Report. written confirmation that capital items were completed;
evaluate the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). actual condition, considering:
- the list of capital items reportedly completed within the last 24 months; and
- their associated actual costs;
confirm with the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. that the actual cost of capital items completed within the last 12 months was factored into the Appraised ValueAppraised ValueAppraiser’s opinion of the Property's market value documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted per the Guide. ; and
document your analysis in the Transaction Approval Memo.

Transaction Approval Memo Documentation
For...	You must document the...
Interior Unit Renovations	specific scope, and estimated percentage of units updated.
Replacements of capital items for refinances	work has been completed based on: an inspection by you, or the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. , or invoices or documentation; or if the work completed cannot be verified, request invoices or other documentation to confirm its completion.

Section 403	Brokered Transactions

Requirements

For any Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely…, you must order:

all third-party underwriting reports; and
a Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… Inspection per Form 4229, unless the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). had an overall rating of 1 on your most recent inspection per Part V, Chapter 5: Surveillance, Section 502: Property Inspections, for a
- Supplemental Mortgage LoanSupplemental Mortgage LoanMortgage 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. , or
- Choice Refinance LoanChoice Refinance LoanMortgage Loan refinancing a Portfolio Mortgage Loan using streamlined underwriting per Part III, Chapter 18: Choice Refinance Loans. .

Operating Procedures

To obtain a Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… Inspection, you must:

use a Fannie Mae-approved Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… inspector per Form 4229;
request an exterior inspection; and
not discuss the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). rating with the Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… inspector.

Requirements

After receiving the Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… Inspection report, you must:

review
- the Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… Inspection report,
- any required PCA ReportPCA ReportProperty Condition Assessment Report documenting the findings of a PCA. , and
- the MBAMBAMortgage Bankers Association Standard Inspection Form;
ensure all rating differences among these 3 reports are:
- reconciled;
- approved by your Chief Underwriter; and
- documented in your Transaction Approval Memo; and
not DeliverDeliverSubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. a 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. if the Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… Inspection’s overall rating is 4 or 5.

You must:

determine if any of these reports identifies
- deferred maintenance,
- near-term capital item replacement,
- necessary life safety or critical repairs, or
- major components exhibiting a declining trend;
incorporate all associated costs into the
- Completion/Repair ScheduleCompletion/Repair ScheduleThe Required Repair Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement, or other Fannie Mae-approved agreement, evidencing: the Borrower’s agreement to fund the Completion/Repair Escrow, and perform Completion…, or
- Replacement Reserve ScheduleReplacement Reserve ScheduleThe Required Replacement Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement (or other agreement approved by Fannie Mae), that evidence the: Borrower’s agreement to replace identified capital items and perform required…; and
document the items in your Transaction Approval Memo.

Operating Procedures

At DeliveryDeliverySubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. , upload the Brokered TransactionBrokered TransactionAny Mortgage Loan sourced by you using a third party (e.g., a Mortgage Loan Broker or Correspondent) for which the third party receives a referral or other similar fee paid by you or on behalf of the Borrower. A Brokered Transaction does not include using an investment sale broker retained solely… Inspection report to DUSDUSDelegated Underwriting and Servicing DocWayDocWayBusiness-to-business electronic documentation delivery application, or any successor system. .

Data Entry
For...	You must complete the following data fields...
DUS Gateway	BrokerBrokerThird-party Person who arranges Mortgage Loan financing on the Borrower’s behalf, or Transfers/Assumptions on behalf of the new Borrower for an assumption, or transferee for a transfer. /Correspondent Company Name; and BrokerBrokerThird-party Person who arranges Mortgage Loan financing on the Borrower’s behalf, or Transfers/Assumptions on behalf of the new Borrower for an assumption, or transferee for a transfer. /Correspondent Individual Name.
AcquisitionAcquisitionAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. Systems	BrokerBrokerThird-party Person who arranges Mortgage Loan financing on the Borrower’s behalf, or Transfers/Assumptions on behalf of the new Borrower for an assumption, or transferee for a transfer. /Correspondent Company; and fees paid to the BrokerBrokerThird-party Person who arranges Mortgage Loan financing on the Borrower’s behalf, or Transfers/Assumptions on behalf of the new Borrower for an assumption, or transferee for a transfer. or Correspondent.

Section 404	Property Condition Assessment (PCA)

404.01	When to Perform a PCA

Requirements

Before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , you must:

complete a PCAPCAAssessment of the Property's physical condition and historical operation. for each PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). unless it is a Supplemental Mortgage LoanSupplemental Mortgage LoanMortgage 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. that complies with Part III, Chapter 14: Supplemental Mortgage Loans, Section 1402.05: Streamlined Underwriting; and
ensure all:
- Potential Red Flags for Mortgage Fraud and Other Suspicious Activity were considered; and
- unresolved red flags were reported per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 310: Compliance.

404.02	Date of PCA Report and PCA Site Visit

Requirements

A PCA Report (Form 4099) containing an HPB ModuleHPB ModulePCA High Performance Building Module assessing cost effective opportunities to increase a Property’s energy and water efficiency and reduce costs. (or any standalone HPB Report) must be dated as of the date of the site visit by the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. , and must be less than 6 months before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .

A PCAPCAAssessment of the Property's physical condition and historical operation. report that does not include an HPB ModuleHPB ModulePCA High Performance Building Module assessing cost effective opportunities to increase a Property’s energy and water efficiency and reduce costs. may be dated up to 12 months before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. if you:

ensure a site visit is performed within 90 days before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. ; and
confirm that there has been no material adverse change to the physical condition of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). since the date of the PCAPCAAssessment of the Property's physical condition and historical operation. report.

404.03	Conducting the PCA

Requirements

When conducting the PCAPCAAssessment of the Property's physical condition and historical operation. , you must:

comply with Form 4099, and order all applicable PCAPCAAssessment of the Property's physical condition and historical operation. modules;
identify all conditions that impact resident safety, marketability, or value of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ; and
properly mitigate those conditions.

If you retain a PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. that does not meet the educational qualifications or professional certifications, registrations, or training required by Form 4099, you must:

determine that the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. is qualified based on their alternative qualifications; and
attach your description of the PCA Consultant’sPCA Consultant’sIndividual or firm conducting a PCA and preparing a PCA Report. qualifications to the final PCAPCAAssessment of the Property's physical condition and historical operation. .

You must have an annual quality control program to review

the quality of the PCAsPCAsAssessment of the Property's physical condition and historical operation. performed by your PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. , and
your compliance with the requirements in this Section and the Form 4099.

Section 405	Completion/Repairs

405.01	Property Evaluation

Requirements

You must:

assess the
- Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). physical condition,
- Borrower'sBorrower'sPerson who is the obligor per the Note. financial condition, and
- life safety Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. ;
aggregate all Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. expenses with the cost of 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. to determine if Part III, Chapter 3: Moderate Rehabilitation Mortgage Loans also applies;
include in the Completion/Repair ScheduleCompletion/Repair ScheduleThe Required Repair Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement, or other Fannie Mae-approved agreement, evidencing: the Borrower’s agreement to fund the Completion/Repair Escrow, and perform Completion…:
- PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). needs identified as Immediate Repairs in the PCAPCAAssessment of the Property's physical condition and historical operation. , including:
  - life safety repairs;
  - critical repairs;
  - deferred maintenance; and
  - short-term replacement of capital items; and
- any capital improvements not recommended by the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. that
  - the BorrowerBorrowerPerson who is the obligor per the Note. will make after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , and
  - you want the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. to include in the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). “as completed” market value; and
ensure the BorrowerBorrowerPerson who is the obligor per the Note. completes the repairs and improvements identified on the Completion/Repair ScheduleCompletion/Repair ScheduleThe Required Repair Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement, or other Fannie Mae-approved agreement, evidencing: the Borrower’s agreement to fund the Completion/Repair Escrow, and perform Completion…:
- per the Completion/Repairs Timing table; and
- assess any code violations and include them in the relevant category.

Completion/Repairs Timing
For...	You must...
Life safety repairs in the PCA	Comply with Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 405.03: Life Safety Issues.
Critical repairs in the PCA	Complete within 6 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , or sooner if recommended by the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. .
Repairs in the PCA required to: comply with the Americans With Disabilities Act, or Fair Housing; or resolve code violations	Complete within 90 days or less per applicable laws, ordinances, or building codes.
Deferred maintenance or items of note in the PCA	Complete within 12 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , or sooner if recommended by the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. .
Short-term replacement of capital items in the PCA	Complete by the specific date recommended by the PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. , but may be longer than 12 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .
Capital improvements that will be completed by the Borrower in addition to those in the PCA, and are included in the Appraisal's "as completed" market value	Comply with Part II, Chapter 2: Valuation and Income, Section 202.03A: Appraised Value.
Completion/Repairs in the PCA that require compliance with Part III, Chapter 3 for a Moderate Rehabilitation Property	Comply with Part III, Chapter 3: Moderate Rehabilitation Mortgage Loans.
All other Rehabilitation Work not identified as a Completion/Repair in the PCA	Comply with Part III, Chapter 3: Moderate Rehabilitation Mortgage Loans.

405.02	Completion/Repairs Funding

Requirements

When full or partial funding of the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. is required, you must complete the Completion/Repair ScheduleCompletion/Repair ScheduleThe Required Repair Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement, or other Fannie Mae-approved agreement, evidencing: the Borrower’s agreement to fund the Completion/Repair Escrow, and perform Completion….

Guidance

The amount funded into the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. on the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. should be at least 125% of the estimated cost of the required Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. .

You may choose not to fund the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. entirely if you determine the BorrowerBorrowerPerson who is the obligor per the Note. has the financial capacity to fully address all Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. in the PCAPCAAssessment of the Property's physical condition and historical operation. .

Requirements

If you choose not to fund the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. entirely, you must obtain written assurances from the BorrowerBorrowerPerson who is the obligor per the Note. in the Multifamily Loan AgreementMultifamily Loan AgreementAgreement evidencing Mortgage Loan terms using Form 6001 series Loan Documents, or another Fannie Mae-approved form. that all necessary Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. will be completed within a stated period of time following the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .

405.03	Life Safety Issues

Requirements

All life safety repairs must be completed

for an AcquisitionAcquisitionAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. , within 60 days after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , or
in all other cases, before delivering the 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. to Fannie Mae.

Guidance

You should consider requiring an escrow deposit (for at least 125% of estimated costs) to cover these required Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. .

405.04	Verifying Completion/Repairs

Requirements

You must verify that the BorrowerBorrowerPerson who is the obligor per the Note. has made all required Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement.

whether the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. was funded or not, and
during your PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). inspections before the required completion date.

Section 406	Replacement Reserve

406.01	Determining Replacement Reserve

Requirements

You must ensure that the BorrowerBorrowerPerson who is the obligor per the Note. has sufficient reserves to cover anticipated capital replacement and major maintenance costs. The total amount in the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. should equal or exceed the anticipated costs (adjusted for inflation) of all necessary capital item replacements and major maintenance needs and repairs for the period from the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. to whichever is sooner:

2 years after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. of the 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. ; or
12 years after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .

To determine the minimum amount of the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. , you must:

obtain a PCAPCAAssessment of the Property's physical condition and historical operation. (Form 4099); and
complete the schedule of items to be included in the Replacement Reserve ScheduleReplacement Reserve ScheduleThe Required Replacement Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement (or other agreement approved by Fannie Mae), that evidence the: Borrower’s agreement to replace identified capital items and perform required…
- using the cost estimates in the PCAPCAAssessment of the Property's physical condition and historical operation. , and
- taking into account any items not already included on the Completion/Repair ScheduleCompletion/Repair ScheduleThe Required Repair Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement, or other Fannie Mae-approved agreement, evidencing: the Borrower’s agreement to fund the Completion/Repair Escrow, and perform Completion….

406.02	Replacement Reserve Funding

Requirements

You must ensure that the costs of all items included in the Replacement Reserve ScheduleReplacement Reserve ScheduleThe Required Replacement Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement (or other agreement approved by Fannie Mae), that evidence the: Borrower’s agreement to replace identified capital items and perform required… have been fully funded for

any TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 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. , and
any 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. , regardless of TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). , that requires Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. costing more than
- 4% of the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 202: Appraisal and Valuation. for refinances, or
- 6% of the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 202: Appraisal and Valuation. for AcquisitionsAcquisitionsAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. .

If you choose to modify the Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. to not fund a Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. for a TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 3 or TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 4 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. , you must use the appropriate Replacement Reserve ScheduleReplacement Reserve ScheduleThe Required Replacement Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement (or other agreement approved by Fannie Mae), that evidence the: Borrower’s agreement to replace identified capital items and perform required….

Guidance

You may choose not to fund a Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. for any TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 3 or TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 4 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. if

the required Completion/RepairsCompletion/RepairsRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. do not exceed the levels specified in this Section, and
you determine that the BorrowerBorrowerPerson who is the obligor per the Note. has the financial capacity to fully address future capital expenditures as outlined in the PCAPCAAssessment of the Property's physical condition and historical operation. .

406.03	Alternative Replacement Reserve Funding

Guidance

Instead of full funding, you may choose this alternative method for funding the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. .

Requirements

If you choose this alternative funding, you must have the BorrowerBorrowerPerson who is the obligor per the Note. deposit the following amounts on the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. :

Monthly deposits for at least 2 years.
For any significant capital item replacement or major maintenance need that you deem appropriate, an amount sufficient to cover anticipated costs for the period from the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. to whichever is sooner:
- 2 years after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. of the 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. ; or
- 12 years after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .

You must hold these amounts in the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. for the entire term of the 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. , and may not make them available for refund to the BorrowerBorrowerPerson who is the obligor per the Note. until the 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. has been paid in full.

Section 407	Escrow Requirements for Taxes and Insurance

407.01	Escrows

Requirements

You must require any TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 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. BorrowerBorrowerPerson who is the obligor per the Note. to make monthly escrow deposits for real estate taxes and insurance premiums.

407.02	Real Estate Tax Escrow Funding

Guidance

You may choose not to fund monthly escrow deposits for real estate taxes for a TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 3 or TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 4 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. .

Requirements

If you choose not to fund monthly deposits for real estate taxes then you must ensure all taxes are paid timely.

407.03	Insurance Escrow Funding

Guidance

You may choose not to fund monthly escrow deposits for insurance premiums for a TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 3 or TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 4 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. .

Requirements

If you choose not to fund monthly deposits for insurance premiums, you must require the BorrowerBorrowerPerson who is the obligor per the Note. to provide annual proof of payment of all insurance premiums.