Conventional Loan Appraisal Requirements in 2023: What Homebuyers Need to Know

Buying a home is an exciting yet stressful process. As a homebuyer, you want to make sure you find the perfect home at the right price One key step is the appraisal, which determines if the home’s value matches the purchase price. Conventional loans have specific appraisal requirements homebuyers should understand before starting the home search.

In this comprehensive guide, we will cover everything you need to know about conventional loan appraisal requirements for 2023, including:

• What is a home appraisal and why is it required?
• Conventional loan appraisal guidelines
• Condition and quality ratings
• Potential appraisal issues
• Roof requirements
• What if repairs are needed?
• Tips for a smooth appraisal

What Is a Home Appraisal and Why Is It Required?

A home appraisal is an estimate of the property’s market value performed by a licensed, professional appraiser. It’s a critical step when obtaining financing because it ensures the home’s value supports the loan amount.

Appraisals are required by all mortgage lenders including for conventional loans backed by Fannie Mae and Freddie Mac. The appraiser provides an unbiased opinion on the home’s value to protect both the buyer and lender.

Key facts about appraisals

• Ordered by the lender but paid for by the borrower (about $500 on average)
• Compares the home to recently sold comparable properties
• Checks the home meets basic requirements and is in acceptable condition
• Ensures the buyer isn’t overpaying for the property

Without an appraisal, the lender is at risk of lending more than the home is actually worth. Appraisals give both parties confidence they are making a sound financial decision.

Conventional Loan Appraisal Guidelines

Fannie Mae and Freddie Mac set guidelines lenders must follow for appraisals on the conventional loans they back. Most lenders also use these standards for non-conforming jumbo loans.

Here are some key conventional loan appraisal requirements:

• Desktop appraisal – For some purchases under $500,000, the lender may use an automated valuation model or AVM instead of an in-person appraisal. This estimates the value using public records and comparable sales.

• Site visit – For most loans, an appraiser will do an exterior and interior inspection of the home. They look at the home’s condition, measurements, layout, improvements, and more.

• Photos – Clear, current photos of the home’s exterior and interior are included in the appraisal report.

• Comparable sales – The appraiser analyzes 3-5 similar homes recently sold in the neighborhood to determine the subject home’s value. Comparables should be nearby, similar size/age, and sold within the past 6 months.

• Market trends – Local real estate trends like home price appreciation in the neighborhood are considered.

• Improvements – Upgrades like a remodeled kitchen are factored in to the home’s value.

Condition and Quality Ratings

The appraiser assigns an overall condition and quality rating to the home on a scale of C1 to C6, with C1 being the top rating. This represents the home’s current physical condition and any needed repairs.

• C1 – The home is newly constructed and not previously occupied.

• C2 – The home is recently constructed and may have minor cosmetic issues.

• C3 – The home shows minor wear and tear appropriate for its age. No major repairs needed.

• C4 – The home needs some minor to moderate repairs, such as deferred maintenance.

• C5 – The home needs significant repairs and improvements to meet conventional loan requirements.

• C6 – The home needs major repairs and is not currently in habitable condition.

Most homes receive a rating of C3 to C5. As long as repairs needed are minor in cost and scope, they can be completed after closing as a condition of the loan. Major issues may require repairs prior to closing.

Potential Appraisal Issues

While most appraisals proceed smoothly, there are a few things that can trip up the process and cause delays:

• Low appraisal – If the appraisal comes in below the purchase price, the buyer may need to pay the difference in cash or negotiate with the seller.

• Required repairs – Moderate to substantial repairs needed could require a re-inspection prior to closing.

• Inaccessible areas – If the appraiser can’t access parts of the home like the roof, it may come back as “subject to inspection.”

• Pest inspection – Termite or other infestations may need a separate pest inspection.

• Specialized inspections – Major issues like a faulty foundation may need further evaluation by an engineer.

• Appraisal appeal – If there are concerns about the valuation, the lender can order a second appraisal.

Conventional Loan Roof Requirements

The roof is an area of increased focus on conventional loan appraisals. Appraisers look for:

• Age of the roof and remaining useful life
• Signs of deterioration like curling, cupping, or missing shingles
• Evidence of leaks or interior water damage
• Required repairs or full roof replacement

Lenders want to ensure the roof will last several more years. If it needs repairs, an inspection by a roofing contractor may be required. Most minor repairs can be completed after closing.

What If My Home Needs Repairs?

It’s common for appraisals to note the need for minor repairs like cracked windows, peeling paint, or worn carpeting. As long as these don’t impact safety or livability, they can be remedied after closing.

More significant repairs like a faulty electrical system, cracked foundation, or major roof damage may require repairs prior to closing. There are several options in this scenario:

• Negotiate with seller – Ask the seller to complete repairs before closing or provide a credit.

• Finance repairs in loan amount – Use a renovation loan like Fannie Mae’s HomeStyle to finance repairs.

• Pay out of pocket – Cover the cost of repairs yourself before closing.

Discuss required repairs with your lender early in the process so there are no surprises derailing your closing date.

Tips for a Smooth Appraisal

While appraisal requirements are set by the lender, homeowners can take steps to maximize their home’s value during the appraisal:

• Make all repairs and improvements before the appraisal. A fresh coat of paint can do wonders.

• Thoroughly clean the home inside and out. First impressions matter.

• Stage each room. Remove clutter and arrange furnishings to showcase the space.

• Gather permits, warranties and invoices for renovations done.

• Point out special features to the appraiser not obvious at first glance.

• Provide a list of recent comparable sales supporting your purchase price.

• Be flexible on timing – appraisers often schedule multiple appointments in one day.

With an understanding of what to expect, conventional loan appraisal requirements don’t have to derail your homebuying plans. Pay attention to the home’s condition, order inspections early, and work proactively with your lender to address any issues.