Here is the underwriting rule referencing your situation (direct from Fannie Mae guidelines):
"Requirements for Existing Construction - When There are Incomplete Items or Conditions that Do Affect the Safety, Soundness, or Structural Integrity of the Property
When there are incomplete items or conditions that do affect the safety, soundness, or structural integrity of the property, the property must be appraised subject to completion of the specific alterations or repairs. These items can include a partially completed addition or renovation, or physical deficiencies that could affect the safety, soundness, or structural integrity of the improvements, including but not limited to, cracks or settlement in the foundation, water seepage, active roof leaks, curled or cupped roof shingles, or inadequate electrical service or
plumbing fixtures. In such cases, the lender must obtain a certificate of completion from the
appraiser before the mortgage is delivered to Fannie Mae. Although the original appraiser should
complete any required certification of completion, the lender may use a substitute appraiser."
Since this is a somewhat major renovation (as opposed to something minor like remodelling a bathroom), you're going to have to wait to complete the refinance. It's not a value issue - it's just not eligible right now.
This is not something that would normally come up in taking an application, so I think you probably should have asked the lender up front if this would be a problem. The application fee most likely went to pay for the appraisal and in most cases you receive a disclosure at the time of application stating under what conditions, if any, an application fee is refundable.
If you paid to apply for the loan AND for the appraisal, then I would politely ask if the lender would be willing to carry the application fee forward when the renovations are complete and you are ready to re-apply. There are some companies (I can think of one - it rhymes with "Chicken Loans") that tell you sorry, once you apply this fee is non-refundable no exceptions. I will normally work with the borrower to find an good compromise and apply things towards their future transaction. If they are not willing to work with you then finish your renovations and take your business elsewhere.
Hope this helps!
-considering you are in the middle of things, if you think you will be finished soon you could stay with your current lender. Rates are improving today and should remain steady or lower for the next several weeks. You could finsih up and just have the current lender have an appraisal reinspection to show the work is done and then close.
-If you are done with the process and lender, then rates should be similar or lower in the near future. You could call the AG's office and tell them your issue. More than likely they will forward your complaint to the mortgage company you are dealing with and they will agree to refund the appraisal to make this all better.
If this were my business and I was dealing with your situation, I would be working with you on this as you will eventually close once the work is completed. Being a little greedy regarding a refund of an appraisal fee is cutting your nose to spite your face. I've eaten appraisals for all sorts of reasons and while its a cost of doing business, a happy customer (even if they cant close) will be worth more to me than a $400 refund
If I list my property for sale I'm legally bound to first disclose any known problems and/or encumbrances. Why? To protect potential buyers from issues they were uninformed of yet, ethically/morally, should have been. The scale is tipped in favor of the average consumer; he is not expected to be "smart enough" to ask whether there is/had been a buried oil tank, a mechanics lien, etc.
Should I have wondered if I might be denied due to my incomplete renovation, and asked the broker/lender? I'm pretty sure that if refinancing consumers were asked to list the factors they knew would be considered (by the broker/lender) when contemplating pulling-the-trigger (that is, committing the application fee) the overwhelming majority would include: credit rating; employment status/history; recent/current financial statement; and, property equity. That's it; period.
Lenders implicitly support this, too. For example: https://www.wellsfargo.com/mortgage/tools/guides-checklists/
I bet there must be many, many others who met each of the factors I listed above (and those specified in Wells Fargo's checklist) only to then be denied due to this underwriting "work-in-progress" issue.
Perhaps I'll see if our Attorney General's office has an opinion on the matter.
Again, thanks for your responses.
You might also be aware that removing a bedroom could also decrease the value.
That may be another reason.
I like the suggestion you already received - to see if the lender will credit you in the future with some of your already paid for expenses in the loan process.
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