What Does It Mean When an Appraisal Is Subject to Repairs?

When you get a mortgage to buy a home, you typically need to have the house appraised. Your mortgage lender will mandate an appraisal to find the fair market value of the house. Lenders want to know this because the home guarantees or serves as collateral for the loan, so they need it to be worth enough that they could sell it and get back their money.

In some cases, your home appraisal will come back "subject to repair." If this happens, what exactly does it mean for you?

Here's what it means when an appraisal is subject to repair

Appraisers are not home inspectors. When they look at a house, their job is to consider its features and overall condition to decide what it is most likely worth. While they aren't there to catch every potential problem with a house, they are on the lookout for certain health and safety issues that could hurt the home's value or its ability to be used as collateral.

If an appraiser sees signs of a health and safety issue, such as a leaky roof, peeling lead paint, a major plumbing problem, wood rot, or a broken HVAC system, the appraiser will note these problems on the appraisal. And, in some cases, they will make the appraisal "subject to repair."

If it is subject to repair, that means their valuation is based on what the home would be worth if those issues were fixed. The appraiser is not valuing the house in its current condition because there is a serious issue with it, but instead is indicating problems must be solved.

Since mortgage lenders care about making sure the collateral is structurally sound and worth enough to guarantee the loan, getting an appraisal subject to repair could create issues. Specifically, the problems identified by the appraiser usually must be fixed before closing.

After the problems have been solved, the lender will likely want a re-inspection performed to make sure the home is satisfactory.

How to respond when an appraisal is subject to repairs

If your home appraisal is subject to repairs, go back to the seller and ask them to make the fixes. Hopefully, they will be cooperative because otherwise, this could derail not only your sale but future sales as well. Almost no lender will provide a loan for a home with serious structural problems or health and safety issues because that house would not be good collateral.

If the seller won't fix it, you'll have to find another solution. You could agree to make the repairs before closing, but it's often not smart to put money into a house you don't yet own in case something falls through with the sale. Or you could do an escrow holdback, which means a certain amount of money -- usually 110% of the estimated repair costs -- would be held back after your closing and not paid to the sellers until the repairs are made.

You should talk to the seller and lender about these options to find a solution. Otherwise, your "subject-to-repairs" appraisal could make it impossible for you to get the loan you need to move forward with buying the home.