Properties Requiring Minor Repairs

If an appraiser observes evidence of wood-destroying insects (termites) or damage such as dry rot or fungus, the appraisal must be prepared “subject to” an inspection by a qualified pest control specialist. Any reported infestation or structural damage affecting the property’s value must be corrected. Soil poisoning is generally unacceptable unless there is assurance it won’t contaminate the water supply.

Yes, a property can often be appraised “as-is” if the existing defects are minor and do not compromise the home’s safety, soundness, or structural integrity. For conventional loans, properties with condition ratings of C1 through C5 are eligible in “as-is” condition. However, if a property has a C6 rating, which indicates severe deficiencies impacting safety or structure, the appraisal must be made “subject to” the completion of specific repairs that would improve the condition to at least a C5.

For a conventional loan, properties with defective or peeling paint must meet basic safety and habitability standards, especially for homes built before 1978. Chipping, peeling, or flaking paint is considered a potential health hazard due to the risk of lead-based paint. Lenders typically require the issue to be corrected before loan approval. Repairs may include scraping, sanding, sealing, and repainting affected areas. Once repairs are completed, a reinspection or appraisal update may be required to confirm compliance.

A Conventional loan does not require repairs for all defects identified during an appraisal. The primary purpose of the appraisal is to determine the property’s market value and ensure it meets basic safety, soundness, and structural standards. Minor cosmetic issues, normal wear and tear, or non-safety-related defects typically do not need to be repaired. However, lenders may require repairs for significant issues that affect habitability, structural integrity, or safety, such as roof damage, faulty electrical systems, or water intrusion. Ultimately, required repairs depend on lender guidelines and any applicable investor or insurer requirements.

Yes, lenders may establish escrow accounts for incomplete repairs on existing properties to allow the loan to close before work is finished. For Fannie Mae, if minor conditions or deferred maintenance items do not affect safety or soundness, the lender may escrow funds for their completion at its discretion. This allows the borrower to close the loan and complete the necessary repairs post-closing.

Fannie Mae generally requires improvements to constitute a legal conforming use. However, if a property represents a legal non-conforming use (grandfathered), it is acceptable provided the appraisal analyzes any adverse effect on value and marketability. If a property has an illegal use, such as an illegal accessory dwelling unit, the appraiser must estimate the cost to bring the property into compliance with local zoning.

Generally, sweat equity (borrower-performed labor) is not an acceptable source of funds for down payments or reserves because assessing its value is difficult. However, under specific programs like the HomeStyle Renovation mortgage, a “Do It Yourself” option exists. This allows borrowers to perform repairs not exceeding 10% of the “as completed” value. The lender must review the work plan and inspect completions for items costing over $5,000. While reimbursement for materials is permitted, borrowers cannot be reimbursed for their own labor.

Minor conditions and deferred maintenance refer to defects that do not affect the safety, soundness, or structural integrity of the property. These issues are typically caused by normal wear and tear associated with the aging of a home. Examples include worn floor finishes, minor plumbing leaks, holes in window screens, missing handrails, or cracked window glass. While these conditions generally do not require immediate repair to qualify for a mortgage, the appraiser must still report them. The appraiser is required to comment on their effect on the property’s value and marketability, ultimately reflecting these issues in the final opinion of value.

Lenders may sell loans to secondary market investors like Fannie Mae before certain improvements are complete, provided the postponed items do not affect the ability to obtain an occupancy permit. Acceptable postponed items often include landscaping, driveways, or walkways, usually delayed due to inclement weather. The lender must establish a completion escrow account withholding funds equal to 120% of the estimated cost to complete the work. These improvements generally must be finished within 180 days of the note date. Lenders must verify completion using specific forms, such as Form 1004D, once the work is finalized.

For properties pending closing in Presidentially-Declared Major Disaster Areas, lenders must determine if damage exists. If damages are minor (often defined as below $5,000) and the property remains habitable, lenders may close the loan by establishing a repair escrow or set-aside for the repairs. However, if damages are significant (e.g., $5,000 or above) or the property is not habitable, the loan generally cannot close until repairs are completed. Documentation, such as damage inspection reports and interior/exterior photographs, is required to quantify the damage and verify that the property has been restored to its pre-loss condition.