A common component of a Fannie Mae Home Renovation loan is a contingency reserve.
A contingency reserve is 10% of the total cost of repairs and is set up prior to close. It is used to cover unforeseen repairs or deficiencies that may be encountered in the rehabilitation of a property.
Contingency reserves are required on 2-4 unit properties, but may also be required on single unit properties (varies by lender).
The contingency reserve can be established through the loan, and considered as part of the total renovation costs. The borrower also has the option to actually fund it themselves if they would like (instead of financing). If unused, the remaining balance in the contingency reserve must be applied to reduce the loan balance, unless the funds were received directly from the borrower.
However, once work is completed, excess funds in the contingency reserve can also be applied towards additional improvements or repairs to the property, providing the borrower provides receipts for materials/labor, approval from the same appraiser, and the lender warrants that all previous work was completed and the remaining balance in the contingency reserve is a surplus.