Lender-required repairs on a conventional loan

What repairs does a conventional loan require before closing?

Usually the ones the appraiser flags as a safety, soundness, or structural problem. Worn carpet, a torn screen, or a dripping faucet usually won't become a lender-required repair on a conventional loan. Ask your loan officer for the appraisal as soon as it's in, and ask whether your loan follows Fannie Mae's or Freddie Mac's rules, because the two draw the line in different places.

Key takeaways

• Fannie Mae accepts a home rated C5 as is. Freddie Mac wants C5 and C6 issues cured before it buys the loan.
• A seller credit doesn't clear a required repair. The lender needs proof the work is done, or for some items a professional's report that no repair is needed.
• A repair counts only with proof in the loan file, such as a signed letter with photos plus a professional's report or paid invoices.

Who decides a repair is required?

The appraiser flags a required repair, and the lender acts on it. Fannie Mae's Selling Guide says the appraiser "must identify items that require immediate repair." When the appraiser finds a safety, soundness, or structural problem, the appraisal is made subject to that repair.

The appraiser's check is visual, of the areas that can be reached. Fannie Mae says appraisers "are not responsible for hidden or unapparent conditions." So your inspection report and your appraisal can list different problems.

When the appraiser isn't qualified to judge a problem, the appraisal is made subject to "a satisfactory inspection by a qualified professional." The lender decides whether that inspection is needed, so ask your loan officer which items are conditions of your loan.

What will stop a conventional loan?

The appraiser's condition rating decides it. Appraisers rate a home from C1, brand new, to C6, the worst.

Sources: Fannie Mae Selling Guide B4-1.3-06, Freddie Mac Guide Section 5605.5.

One bad area sets the rating for the whole house. Fannie Mae's rule: "if any portion of the dwelling is rated a C6, the whole dwelling must be rated a C6." Freddie Mac applies the same logic to any deficiency "consistent with a C5 or C6 condition rating."

Which inspection findings become required repairs?

Fannie Mae's completion rules give examples: "foundation settlement, water seepage, active roof leaks, worn roof shingles, inadequate electrical service or plumbing fixtures." Freddie Mac's list adds these:

• "Uncapped wiring"
• "Curled, cupped or missing roof shingles"
• "Standing water in the property, water seepage/intrusion or significant plumbing leaks"
• "A mechanical system that is non-functional"
• "A sanitary system with evidence of failure"

Some findings can clear with a professional's report instead of a repair. Fannie Mae names "evidence of infestation (such as, wood-boring insects), dampness, or abnormal settlement." The lender then needs proof it was fixed, or a professional's report that it "does not pose any threat of structural damage to the improvements."

Get a written bid from the licensed trade before your inspection deadline if your report shows any of these. That means a roofer for a leak, an electrician for open wiring, and a structural engineer's report for settlement.

Which items can stay as they are?

Minor wear can stay as it is. Fannie Mae's examples are "worn floor finishes or carpet, minor plumbing leaks, holes in window screens, missing handrails, or cracked window glass." It says such conditions "generally do not rise to the level of a required repair." Freddie Mac's as-is list includes damaged trim, missing interior doors, and "Deteriorated sidewalks."

These can still go on your repair request. The loan just doesn't force them. See what to ask for after a home inspection for how to rank the rest of your list.

What should you ask the seller for?

Ask the seller to fix each required repair before closing and to hand over the paperwork. Money off the price won't clear the item on the appraisal. Use a credit or price cut for the rest of your list; repairs vs. credit vs. price reduction weighs the three.

The paperwork matters because you may be the one signing. Fannie Mae accepts an appraiser's Form 1004D or, for certain repairs on an existing home, a borrower attestation letter. That letter needs photos or other visual proof of the work and one of these: "signature of the qualified professional, a professionally prepared report, or paid invoices for the alterations or repairs."

An appraiser can certify completion on Freddie Mac Form 442, and Freddie Mac's completion rules accept a Form 400 you sign. The Form 400 needs photos plus the professional's signed report or paid invoices, and it must "Be dated before the Settlement Date." Before you sign the letter or the form, see the finished work yourself or have your inspector recheck it.

What if the seller won't fix a required repair?

Under both guides, the loan can't be sold with the item unfixed. Fannie Mae says C6 loans "are not eligible for sale to Fannie Mae." Ask your loan officer what that means for your closing date, then pick a path:

• Send the seller the licensed trade's written bid so the cost is concrete, not a guess.
• Ask whether a professional's report will do. Freddie Mac accepts "evidence of the repair or an inspection report that indicates the condition does not require repair."
• Use your contract's inspection or financing terms. Your contract sets the exact dates, terms, and what happens to your earnest money, so confirm them with your agent or attorney.

Can you get a conventional loan on a house that needs repairs?

Yes. Minor wear can stay as it is, and required repairs clear once they're done and proven. For a house that needs more work than a seller will do, Fannie Mae's HomeStyle Renovation mortgage lets you "include funds in the loan amount to cover the costs of repairs, remodeling, renovations, or energy improvements." Ask your loan officer whether they offer it. The repair budget becomes part of your loan, so price the work before you apply.

Can a required repair be finished after closing?

On a standard purchase, Fannie Mae's written after-closing path covers only minor items. It lets the lender "escrow for these items at its own discretion" if they don't affect safety, soundness, or structural integrity. For everything else, "the lender must verify completion before the loan is sold to Fannie Mae." Fannie Mae's 180-day postponed-improvement rule is written for "new or proposed construction," not a resale home.

How do I know what my repair list is worth?

Your repair list is worth what the trades will charge, so get the licensed trade's bid on each required item. For the rest, Kept prices every line of an inspection report for $79, usually under 4 hours. Findings that need an engineer, like foundation movement, are flagged and not priced. The methodology shows how each price is built.

If your appraisal came back "subject to" and your deadline is close, upload your inspection report to Kept and walk into the repair talk with a number on every line that can be priced today.

Sources

• Fannie Mae Selling Guide B4-1.3-06, Property Condition and Quality of Construction of the Improvements
• Fannie Mae Selling Guide B4-1.2-05, Requirements for Verifying Completion and Postponed Improvements
• Fannie Mae Selling Guide B5-3.2-01, HomeStyle Renovation Mortgages
• Freddie Mac Seller/Servicer Guide Section 5605.5, Improvements analysis
• Freddie Mac Seller/Servicer Guide Section 5605.8, Requirements for properties subject to completion or inspection