Even before you decided to put your home up for sale, you probably knew making minor repairs and sprucing up your home would increase the chances of attracting the right buyers and getting a great offer. But, you may not realize how much the condition of your property — its appearance, maintenance and safety — can impact the chances of converting that awesome offer into a smooth sale.
For most buyers to get the money to close the deal, their lender has to confirm that your home is worth at least the amount they are financing and that it meets some basic standards.
What is an appraisal and why is it important?
Before properties can be financed, their value and condition is typically examined by a state-licensed, independent appraiser contracted by the buyer’s mortgage company.
By applying the lender’s required list of safety and maintenance criteria to the property, the appraiser provides invaluable insight in a boots-on-the-ground, first-hand review by an impartial party.
According to the Appraisal Institute, the appraisal report generally consists of a description of the property and its locale; an analysis of the “highest and best use” of the property; an analysis of sales of comparable properties “as near the subject property as possible;” and, information regarding current real estate activity and/or market area trends.
It’s important to distinguish that appraisals are not intended to be a home inspection. Appraisers determine home value while inspectors primarily focus on the condition of the home and property.
What are minimum property standards?
While an appraisal is not in the same category as the more in-depth home inspection, different mortgage types (such as conventional loans or government-backed FHA, USDA, or VA loans) have different minimum property standards. These are standards related to the overall condition of a property which will play a role in the willingness and/or ability of a lender to finance a buyer’s loan.
But when you place your home on the market, it’s hard to predict if your top offer will come from a cash buyer or a buyer pre-qualified for a home loan.
So how can you know what kind of repair issues could potentially derail a sale — before you even have an offer?
To explore your options with potential appraisal required repairs, we gathered expert advice from appraisers, lenders and top agents. We’ll cover what you need to know about minimum property standards before an appraiser comes knocking on your door.
How does a buyer’s loan type affect minimum property standards?
According to the National Association of Realtors® Research Group’s 2021 data, 64% of buyers used conventional loans, 16% used FHA loans and 14% used VA loans.
A conventional loan is a private mortgage, which is usually backed by a commercial enterprise such as a bank, mortgage company, or credit union. Conventional loans have their own minimum property requirements — set by Fannie Mae and Freddie Mac, government-sponsored enterprises that buy loans on the secondary market — but those requirements tend to be relatively flexible. Further, individual lenders can opt to add their own minimum property requirements on top of the Fannie and Freddie requirements.
By comparison, to be eligible for an FHA loan, the property must meet U.S. Department of Housing and Urban Development’s (HUD) minimum property requirements. These FHA requirements are typically stricter than those of conventional loans, and they help protect the buyer from purchasing a home that needs more maintenance than they can afford. It also protects the government from being stuck with an uninhabitable property, if the buyer defaults on the loan.
Generally speaking, conventional lenders tend to be more flexible about deficiencies cited in the appraisal. They may allow for a price adjustment to compensate for the estimated cost of fixing the problem rather than demanding proof the problem is fixed within a certain time frame. On occasion, conventional lenders may even finance a fixer-upper property sold “as is.”
It’s not impossible to finance a fixer upper with an FHA loan, but it is more difficult (though you always have the option of exploring a FHA 203(k) rehab loan). FHA loans must meet very specific standards. And, the lender cannot approve the buyer’s loan until the seller resolves any significant issues discovered in the appraisal. Depending on the type of work necessary, FHA requires repairs to be made within six months after the loan’s closing.
How can I know if my home will meet minimum property standards?
If you’re unsure whether your home will meet appraisal requirements, you can start by taking a look at the FHA minimum property standards, says Daniel M. Fries, SRA, a metro Atlanta appraiser with 40 years of experience. “If your house complies with FHA, then it complies with most other lenders’ requirements.”
FHA is focused on three things: safety, soundness and security. “The things [the sellers] have to do for FHA,” says Fries, “they probably should be doing anyway.”
- A safety issue is anything that places the health or safety of the occupants at risk.
- A soundness issue typically involves a physical condition that may affect the structural soundness of a home.
- A security issue is generally related to the home or belongings being at risk.
In short, the home must be livable, which means it typically also must have:
- A sufficient supply of continuous potable water
- Usable sanitary facilities
- At least one bathroom with a working toilet, sink, bathtub or shower
- Safe disposal of sewage
- Working appliances
- Adequate heating, electricity, and hot water
If your home doesn’t meet the appraiser’s criteria, you risk the property’s eligibility for certain loans. If the appraiser flags significant repairs that must be made before closing, it opens the door to closing delays or the opportunity for the buyers to renegotiate or even void the contract.
In addition, “FHA is the one that you need to be a little nervous about if you’re a seller,” says Fries. “If I do an FHA and it doesn’t appraise out, that value sticks with the home.” For 120 days, any buyer who applies for an FHA loan on the property will typically receive the same valuation. If the deal falls through and the house goes back on the market, that appraisal can limit your purchase price and prospects.
We advise sellers to make the repairs before the appraiser shows up.
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Addressing minimum requirements as part of your marketing plan
Making sure your home meets minimum property standards and avoids appraisal required repairs is an essential part of your marketing strategy. In his experience as a mortgage lending expert with HomeLight Home Loans, Richard Helali has observed that pre-listing inspections — by an experienced agent or even a home inspector — are often successful in pre-empting unpleasant appraisal surprises.
After the sellers repair the problems revealed on the pre-listing inspection, Helali says, “the agent and sellers can expect buyers to come in with an aggressive offer without an inspection contingency.”
As usual, the best resource is to engage the services of a top-notch real estate agent such as Keri White. As an agent who sells properties more than 56% quicker than the average Los Angeles agent, White can quickly reel off a list of issues likely to be cited by appraisers that can require repair. “We advise sellers to make the repairs before the appraiser shows up,” says White.
Why would appraisers require repairs?
Although home appraisals primarily function as a way to determine the market value of a property, they can also include recommendations for repairs that a seller will have to fix in order for the buyer’s financing to go through.
Conventional loans tend to be more flexible and accommodating when it comes to resolving repair issues. In fact, it’s relatively rare for appraisal required repairs to hold up conventional loans.
Common repairs for conventional loans
Unless you’re selling your home “as is,” you’ve probably fixed these issues in anticipation of a home inspection and house showings. Otherwise, you may need to make the following fixes if your buyer uses a conventional loan:
Lead-based paint and asbestos
The appraisal report for homes built prior to 1978 contains both a lead-based paint and an asbestos statement.
Most lenders will still underwrite the loan as long as the paint is in good condition with no flaking or chipping and the asbestos in flooring, shingle or tile is properly contained.
If there’s some flaking paint, some conventional lenders may allow appraisers to deduct the cost of the paint job from the value but not require the repair prior to sale.
An appraiser’s top priority is the safety of the home, so if handrails on steps and stairs aren’t properly secured, or are missing entirely, you could be required to fix them.
Age and condition of roof
Conventional appraisers like to see two years of life left on a roof, though they won’t necessarily require repair unless the roof has visible damage. If your roof’s shingles are missing or curling and nails are loose, you may need to fix the issue before your buyer can close their loan.
Obvious cracks or water filtration in the foundation are a tremendous cause for concern and a harbinger of expensive repairs. If your home’s foundation has damage that the appraiser deems “unacceptable,” then your buyer’s loan might fall through.
Appraisers will flag any major issues regarding plumbing, electrical, and HVAC (heating, ventilation, and air conditioning). All systems should be in working condition, or you may need to repair them before a bank will secure the buyer’s loan.
Electrical, exposed wiring and fuse boxes
Any loose wires should be clipped or safely capped. If turning on lights or other electrical devices pops a breaker all the time, it’s time to get it fixed.
Appraisers have a detailed list of features to photograph, evaluate and document in almost every room of the house. If the appraiser finds anything on the property that fosters unsafe living conditions, it will be noted in the report.
Repairs for government loans
While conventional loans offer more leniency on appraisal required repairs, government-backed loans have stricter property requirements.
Appraisals are required for all home purchases seeking FHA, VA, and USDA loans, which have similar property requirements. The property must meet the U.S. Department of Housing and Urban Development’s (HUD) minimum property guidelines.
In addition to the repairs for conventional loans, federally-funded loans typically require these items to be repaired, usually before closing.
Water heater relief valve
Gas or electric water heaters have an expansion relief valve, a pipe that comes out of the water heater that lets pressure out. “If something happens to your water heater, the valve keeps the water heater from blowing up like a grenade,” says Fries. While it’s an important safety issue, the repair is generally not expensive.
Water infiltration issues involve damage created by moisture seeping or leaking into a home. The damage can be caused by internal plumbing problems as well as rain water or improper drainage from outside. Basically, if there’s a drip or a visible moisture stain, you may need to find the source, fix the problem and repair the damage.
You need to have a little bit of space between wood and dirt to prevent moisture from wicking up from the ground as well as to avoid giving insects (such as termites) and other critters a superhighway into your home. For example, “If you have a deck and the wooden supports go directly into the ground, that’s a deal-killer,” says Fries. While he warns against solving the problem with temporary support jacks, brick or concrete footers can solve the issue. And, don’t look to your overgrown bushes to camouflage the problem, FHA requires inspectors to go into and photograph the crawl space.
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Any wood rot, on windows, doors, fascia or other exterior trim will likely be flagged for repairs.
Pull-chain light switches
If your crawlspace, attic, or closet has a single lightbulb turned on by a pull-chain, according to the HUD’s guidelines, you’ll have to replace it. While this is listed as an inspection point, Fries says he has never seen pull-chains become a problem.
FHA requires handrails when appropriate; but, the criteria is open to interpretation. Most appraisers should default to the local building code in the home’s geographical area.
If a structure on your property encroaches on an adjacent lot, it’s no longer eligible for FHA mortgage insurance. That means a government loan is unlikely unless you can get the neighboring property to agree to allow the encroachment. You also need to disclose the existence of other encroachments, such as a fence that is a little over the neighbor’s property line. Then, the appraiser can determine if the encroachment does or does not impact value.
If you completed home renovation work without a permit, there’s generally no way to ensure its safety. You might have to retroactively obtain a permit for the work completed if you want to sell to a buyer with a government-backed loan.
If you have multiple living units on your property, the utilities must each be separated. As with a conventional loan, they must be in working order.
Your kitchen must be properly ventilated with working fans. Frequently, stoves have a small vent hood in the microwave above. That fan only recycles air back into your home through a charcoal filter. Depending on code, that ventilation may be acceptable for an electric stove. However, a gas stove should usually be vented to the outside.
All rooms categorized as bedrooms on your property must have a window with outside access in the event of a fire or other emergency.
Attic and crawl space inspection
Lenders require photos of the crawl space and attic to make sure the structural integrity isn’t compromised by mold, leaks, fire damage, cracked beams or animal invasion. However, sometimes, Fries says, appraisers encounter “readily observable” hazards such as plastic bags, paint cans or gasoline near the furnace — all of which make the report.
The guidelines can seem exhaustive and complicated, so when in doubt, remember it typically all comes down to health and safety. If there’s something in your home, from a loose floorboard to an unsecured handrail, that could jeopardize the safety of an occupant, it’s likely going to be flagged.
The appraiser flagged an issue — now what?
Other than issues related to specific code or safety criteria, the majority of the appraiser’s checklist involves obvious items that should have been resolved before showings.
Because her proactive approach works, White reports, “99.9% of the time appraisers are not asking for repairs on properties on either side of the transaction.”
But sometimes, despite your best efforts, an appraiser identifies repairs that must be made. It can be something as colossal as a roof replacement or as simple as installing a carbon monoxide monitor or installing a side gate that leads to a backyard pool.
If your home appraises below market value or significant repairs are required, buyers may have the option to walk away from the sale.
But, in the current low inventory-high demand market, sellers can take the initiative to anticipate and avoid that scenario altogether.
“In a multiple-offer market,” White says, “sellers may choose a cash buyer with no appraisal required.”
Sellers and their agents can also request an appraisal waiver to the contract. In the northern Atlanta suburbs, Fries estimates nearly 20% of contracts have clauses that give buyers the right to inspect, with the property selling “as is.”
“While the property may not qualify for FHA, you can sell your home and waive a lot of these normal repairs — unless it’s a safety issue,” says Fries. “In other words, the water heater, gas fumes, broken window panes, steps without a handrail — anything a toddler can get hurt on.”
In addition, White says, “Properties financed by conventional loans are supposed to have all the equipment and appliances working with no known defects,” she says “But, a lot of times, they don’t require those repairs to be done to close.”
In the case of government loans, not all repairs must be made before closing, but they must be completed within a year of closing.
Who pays for those repairs depends on your purchase agreement with the buyer. Most purchase agreements include a clause regarding who will pay for repairs up to a certain value.
“Normally, required repairs become a negotiation, which depends on the market,” says White.
“If they have backup buyers, most sellers are unlikely to do the repairs,” she says. “They’re likely to tell the buyer to pay for and be liable for the repairs and arrange for the appraiser to come back.”
However, if the appraiser comes back with multiple, large-scale issues flagged, there’s a chance both conventional and government-backed mortgages will be denied. The property might not be safe enough for a bank to back it. In that case, you might consider selling your home “as is” for cash.
Bottom line — know the minimum property standards and make the repairs
Sellers can easily avoid the most common appraisal-related closing killers by simply making the same improvements and repairs most top agents require to get their home in top shape for sale.
A top-rated real estate agent will have the experience and expertise to successfully guide you through the home inspection and selling process. Locate a great agent using HomeLight’s Agent Match tool, which analyzes over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.
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