When an appraisal comes back subject to repairs, the appraiser has assigned the home a value that only holds if specific fixes get made first. The lender treats each flagged item as a hard requirement, and the loan cannot close until every condition is resolved and verified. No rule says whether the buyer or the seller pays for the work; that is negotiable, and the answer usually comes down to who has more leverage in the market.
What Triggers a Subject-To Appraisal
Appraisers flag anything that threatens a home’s safety, structural soundness, or long-term durability. Cosmetic problems rarely qualify. Functional problems almost always do.
Peeling, chipping, or flaking paint on homes built before 1978 is one of the most common triggers. Lead was a standard ingredient in residential paint until the Consumer Product Safety Commission banned it that year, and roughly three-quarters of pre-1978 housing stock still contains some lead-based paint.1HUD Exchange. Lead-Based Paint Regulations Intact paint is fine. Deteriorating paint requires stabilization or abatement.
Roofs and foundations get scrutinized closely. HUD’s property analysis guidelines tell appraisers to flag any element that will reach the end of its useful life within two years. A roof with visible deterioration, missing shingles, or active leaks will almost always land in “subject to” status. Foundations must be adequate to withstand normal loads, and cracking, shifting, or settling that raises structural concerns triggers a call for professional evaluation.2U.S. Department of Housing and Urban Development. HUD Handbook 4150.2 – Property Analysis
Heating and electrical issues catch many buyers by surprise. A home that relies on a wood-burning stove or solar system as its primary heat source must also have a conventional backup capable of keeping plumbing areas at 50 degrees Fahrenheit or above.3U.S. Department of Housing and Urban Development. HOC Reference Guide – Electrical and Heating Exposed or deteriorated wiring raises red flags, as does anything that cannot safely handle the home’s electrical load.
Environmental hazards belong on the list too. When an appraiser becomes aware of hazardous substances on or near a property, they must note the condition, comment on how it affects value, and make the appraisal subject to inspection by a qualified professional.4Fannie Mae. Environmental Hazards Appraisal Requirements Radon, asbestos, visible mold, significant termite damage, and proximity to known contamination sites all fit here. Appraisers are not environmental experts, but they are responsible for flagging what they observe.
New construction is a separate category. If the home is still being built, the report gets marked “subject to completion per plans and specifications,” meaning the valuation assumes the builder finishes the work as designed.
How Your Loan Type Changes the Rules
The loan program behind the purchase decides how strict the property standards are, which in turn decides what shows up as a required repair.
FHA loans are the most prescriptive. HUD consolidates all FHA appraisal standards in Handbook 4000.1, covering safety, security, and soundness for every FHA-insured mortgage.5U.S. Department of Housing and Urban Development. Single Family Housing Policy Handbook 4000.1 FHA appraisers examine everything from peeling paint and missing handrails to water damage and crawl space ventilation.
VA loans use the Minimum Property Requirements to ensure a veteran is buying a home that is safe, sanitary, and structurally sound. Mechanical systems must be safe to operate and have reasonable future utility, the home must have adequate heating, and potable water and domestic hot water are mandatory.6U.S. Department of Veterans Affairs. Basic MPR Checklist The VA appraiser’s Notice of Value lists any items requiring repair before the loan can close.7U.S. Department of Veterans Affairs. VA Home Loan Guaranty Buyers Guide
USDA Rural Development loans point directly at HUD’s FHA standards. Existing dwellings must meet the minimum property requirements in Handbook 4000.1, so the inspection criteria largely mirror FHA.8U.S. Department of Agriculture. HB-1-3555, Chapter 12 – Property and Appraisal Requirements USDA also layers on site rules: location in an eligible rural area, hard-surfaced or all-weather road access, and community utility compliance.
Conventional loans backed by Fannie Mae are the most forgiving. Fannie Mae permits “as-is” appraisals when existing conditions are minor and do not affect safety, soundness, or structural integrity. Only properties with the lowest condition rating, indicating deficiencies that impact safety or structural integrity, require a subject-to appraisal.9Fannie Mae. B4-1.3-06, Property Condition and Quality of Construction of the Improvements Cosmetic issues that would stop an FHA or VA loan often will not slow a conventional one on the same house.
Who Pays for the Repairs
This is where deals stall, and sometimes die. No rule assigns responsibility. The outcome usually reflects who has more leverage.
In a buyer’s market, sellers typically absorb the required repairs to keep the transaction alive. In a seller’s market, buyers often end up covering the work or losing the property. Many deals split the difference: both sides share the cost, or the seller does the work and adjusts the contract price upward. The repairs themselves are not optional if the buyer is using that loan program. Someone has to pay, or the loan does not close.
When the two sides cannot agree, the buyer’s protection is the appraisal contingency. Most purchase contracts include one, and it lets the buyer cancel without forfeiting earnest money when appraisal issues cannot be resolved. Sellers sometimes refuse repairs on the theory that the next buyer will use a loan program with looser standards, and sometimes they are correct. A conventional buyer may not face the same conditions that tripped up an FHA or VA buyer on the same house.
One workaround worth knowing: the seller pays for the repairs and raises the contract price by the same amount. The buyer effectively finances the repair cost through the mortgage. This only works if the property still appraises at or above the new price. On government-backed loans, seller contributions toward the buyer’s costs are also capped by program rules, and going over those caps reduces the maximum loan amount.
When the Repair List Is Too Big: FHA 203(k)
If the required work is more than anyone wants to complete before closing, the FHA 203(k) rehabilitation loan can rescue the deal. It rolls the purchase price and renovation costs into a single mortgage, so the buyer closes first and does the work afterward.
The Limited 203(k) covers non-structural improvements up to $75,000 in renovation costs, including items commonly flagged in conditional appraisals: roofing, plumbing, electrical, HVAC, lead paint stabilization, and accessibility modifications. Work must finish within nine months of closing.10U.S. Department of Housing and Urban Development. 203(k) Rehabilitation Mortgage Insurance Program Comparison
The Standard 203(k) handles larger projects with structural work, such as foundation repair, structural alterations, or changes to a property’s unit count. The Standard program allows 12 months and has no cap on renovation costs beyond the FHA loan limits for the area.10U.S. Department of Housing and Urban Development. 203(k) Rehabilitation Mortgage Insurance Program Comparison
If a lender already opened a standard FHA case and the appraisal comes back with extensive repairs, the case can be converted to a 203(k) without starting over. The lender updates the case data to a 203(k) code, avoiding the cost and delay of a second appraisal.
When Repairs Cannot Finish Before Closing: Escrow Holdbacks
Sometimes the timing does not work. Exterior painting in January, a roof replacement during a wet season, or a materials shortage can make it impossible to finish before the scheduled closing. An escrow holdback lets the transaction close on time by setting aside funds to guarantee the work gets done afterward.
Under Fannie Mae’s rules, the lender withholds 120 percent of the estimated repair cost from the purchase proceeds and deposits it into a custodial escrow account. If the contractor provides a guaranteed fixed-price contract, the escrow only needs to cover the full contract amount rather than the 120 percent buffer. The postponed work must be completed within 180 days of the note date, and it cannot affect the property’s ability to obtain an occupancy permit.11Fannie Mae. Requirements for Verifying Completion and Postponed Improvements For Fannie Mae loans, the total cost of postponed improvements also cannot exceed 10 percent of the appraised value.
The lender must obtain a final title report confirming no mechanic’s liens were filed against the property during the repair period. Once completion is verified, the remaining escrow funds are released. If the work is not done within the deadline, the lender can use the escrowed funds to hire contractors and finish it. That is exactly why the 120 percent cushion exists.
If You Think the Appraiser Got It Wrong
You can ask the lender to initiate a reconsideration of value. Federal interagency guidance directs lenders to establish processes for these requests, with clear instructions for borrowers on how to raise concerns early enough to resolve them before a final credit decision.12Federal Register. Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations
The request works best with specific, verifiable information the appraiser may not have considered: a recent comparable sale that contradicts the condition assessment, a professional inspection report that clears the flagged item, or documentation that a repair was already completed. General complaints about the appraiser’s judgment rarely produce results. The lender forwards the material to the appraiser, who decides whether to revise the report. In some cases, the lender may order a second appraisal at the borrower’s expense.
A reconsideration is not guaranteed to change anything, and it takes time. If the closing date is close, pursuing repairs in parallel is safer than waiting on the outcome.
Clearing the Conditions After the Work Is Done
Once repairs are finished, the paperwork does the heavy lifting. The lender needs proof that the property now matches the condition the appraiser assumed when assigning value.
Assemble paid contractor invoices that spell out the scope of work and the materials used. If the homeowner did the work personally, keep material receipts, though many lenders require a licensed professional for anything structural, electrical, or plumbing. Pair the invoices with high-resolution photos of each repaired area, and before shots if you have them. Visual evidence is the fastest way to satisfy an underwriter who was not on site.
Most lenders provide a Repair Certification form through their online portal or from the loan officer. The form asks the borrower or seller to confirm that all listed repairs were completed according to the appraiser’s specifications, including the completion date and who did the work. Vague or incomplete entries send the file back to the bottom of the underwriting queue.
With documentation in hand, the lender schedules a reinspection, typically with the same appraiser. The appraiser verifies each flagged condition and completes Form 1004D, the Appraisal Update and/or Completion Report.11Fannie Mae. Requirements for Verifying Completion and Postponed Improvements The VA sets its reinspection fee at $150.13U.S. Department of Veterans Affairs. VA Appraisal Fee Schedules and Timeliness Requirements Fees for conventional and FHA reinspections vary by market but generally fall in a similar range.
Once the underwriter matches the appraiser’s findings to the invoices and photos on file, the subject-to designation comes off and the file moves to clear to close. If the reinspection turns up work that was not done properly, the appraiser documents what remains deficient and uploads the report.14Department of Veterans Affairs. Circular 26-14-8 – Repair Inspection Processing Procedures Each failed visit adds cost and delay, so getting the work right the first time is the single best way to protect the closing date.