When it comes to buying or selling a home, understanding what appraisers look for during an inspection is crucial—especially when it comes to rating the condition of the property. Appraisals with a C5 or C6 condition rating can make hearts sink, as these ratings often signal trouble for financing options. Let’s break down what appraisers focus on and how to prepare, especially if your clients are considering fixer-uppers or homes needing some TLC.

What Are Appraisers Looking For?

Fannie Mae and Freddie Mac are primarily concerned with the health, safety, and structural integrity of a property. Unlike FHA, VA, and USDA loans, which have stricter Minimum Property Requirements (MPR), conventional loans are less focused on deferred maintenance.

Here’s how property condition is rated:

  • C1 to C6: The scale appraisers use to grade properties, with C1 representing the best condition and C6 the worst.

Some lenders, such as Flagstar and Mr. Cooper, will not lend on properties rated C5 or C6. Freddie Mac also won’t lend on as-is properties in C5 or C6 condition. However, Fannie Mae will allow a C5 rating as-is, provided the lender accepts it.

What Causes a C5 or C6 Rating?

Properties rated as C5 or C6 often have significant issues that compromise their safety or functionality. Common examples include:

  • Active roof leaks
  • Water seepage or significant plumbing leaks
  • Uncapped wiring
  • Curled, cupped, or missing roof shingles
  • Damaged or falling foundations
  • Mechanical systems that are non-functioning or past their expected lifespan
  • Failing sanitary systems

These are the deal-breakers for Fannie Mae, Freddie Mac, and many lenders.

What About Lesser Issues?

For properties that don’t quite hit C5 or C6 but still need some work, appraisers may flag less critical issues. These “C4 and below” items are typically allowable, subject to lender discretion:

  • Worn floor finishes or coverings like carpet
  • Minor cracks in windows
  • Minor damage to interior walls
  • Damaged or missing interior doors
  • Damaged or missing window screens or cabinet doors
  • Missing handrails (case-by-case)
  • Deteriorating countertops
  • Missing hardware, such as handles
  • Missing light fixtures, electrical switches, or faceplates
  • Damaged or missing trim
  • Minor plumbing leaks that don’t cause damage (e.g., a dripping faucet)
  • Deteriorated sidewalks

While these issues may not prevent a loan from being approved, they can still impact the overall appraisal and condition rating.

Tips for Realtors and Buyers

If you or your clients are looking at properties that need some TLC, it’s vital to know what appraisers will be scrutinizing. Here’s how to stay ahead:

  1. Pre-Inspect Fixer-Uppers: Have a clear understanding of any major deficiencies before submitting an offer.
  2. Work with Knowledgeable Lenders: Some lenders may accept a C5 rating for Fannie Mae loans. At North Star Mortgage Network, we can guide you through these nuances and help you find the best options. Visit us at www.nsmn.com to learn more.
  3. Address Minor Repairs: Encourage sellers to fix minor issues that could impact the appraisal’s condition rating.

Final Thoughts

Understanding appraisal deficiencies and property condition ratings is key to ensuring a smooth home-buying process. Whether it’s avoiding a deal-breaking C5 or C6 rating or navigating lender discretion on C4 properties, preparation is everything.

At North Star Mortgage Network, we specialize in helping buyers and realtors navigate the complexities of home financing. Visit www.nsmn.com to learn how we can support your homeownership goals today!

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