Why Property Condition Matters for Your Mortgage
When you apply for a Fannie Mae-backed mortgage, the appraiser doesn't just determine your home's value. They also evaluate its condition and construction quality using standardized ratings that directly affect your loan eligibility.
The appraiser assigns two key ratings: a condition rating (C1 through C6) and a quality rating (Q1 through Q6). These aren't just academic exercises. A C6 condition rating means your loan cannot be sold to Fannie Mae until specific repairs are completed.
Say you're buying a 1960s ranch house with a solid foundation and good bones, but the electrical panel is outdated and poses a safety risk. The appraiser would likely assign a C6 rating, triggering a "subject to" appraisal that requires electrical repairs before your loan can close.
Understanding the Condition Rating Scale
The condition ratings work on a scale where C1 represents new construction and C6 indicates serious safety issues. Most existing homes fall into the C3 to C5 range.
C1 and C2 properties are essentially new or completely renovated homes with no deferred maintenance. C3 homes show normal wear but are well-maintained. C4 properties need minor repairs like fresh paint or small plumbing fixes.
C5 homes have obvious maintenance issues that affect livability but remain functional. Think of a house with an aging HVAC system, worn flooring throughout, or windows that need replacement. The home is still livable, but it needs attention.
C6 is the critical threshold. This rating applies when any part of the property has deficiencies affecting safety, soundness, or structural integrity. Even if 90% of the house is in excellent condition, one serious issue like a compromised foundation or dangerous electrical work triggers a C6 rating for the entire property.
What Triggers a C6 Rating and Loan Problems
Certain conditions automatically result in a C6 rating and make your property ineligible for Fannie Mae financing until repairs are completed. These include structural damage, electrical hazards, plumbing issues that affect habitability, and roofing problems that compromise the building envelope.
A cracked foundation wall that shows signs of movement would trigger C6. So would knob-and-tube wiring, a furnace with a cracked heat exchanger, or extensive water damage that hasn't been properly remediated.
The key distinction is safety and structural integrity. A kitchen with 1980s cabinets and old appliances might look dated, but it won't trigger C6. However, exposed electrical wires or a sagging floor that indicates structural problems will.
If your property receives a C6 rating, the appraisal becomes "subject to" completion of specific repairs. You cannot close your loan until those repairs are finished and documented, typically requiring a re-inspection or professional certification.
Quality Ratings and Construction Standards
Quality ratings (Q1 through Q6) evaluate the level of construction and materials used in the home. Unlike condition ratings, most quality ratings don't prevent loan approval, with one important exception.
Q1 and Q2 represent custom or architect-designed homes with high-end materials and exceptional workmanship. Q3 and Q4 cover most tract homes and builder-grade construction that meets current standards. Q5 represents basic, economy construction that meets minimum building codes.
Q6 is the problematic rating. It indicates basic quality construction that may not be suitable for year-round occupancy or was built without proper permits or professional oversight. Like C6 condition ratings, Q6 quality issues that affect safety, soundness, or structural integrity must be repaired before loan delivery.
A property might receive Q6 if it has unpermitted additions, substandard electrical or plumbing work, or was built using inappropriate materials for the climate. However, Q6 properties can still qualify for Fannie Mae financing once safety issues are addressed.
How Appraisers Evaluate Your Property
Appraisers must take a holistic view of your property, considering all improvements together rather than focusing on individual rooms or systems. They cannot rate your home based on how it compares to neighboring properties.
The appraiser inspects all accessible areas of the property, including the interior, exterior, attic, basement, and mechanical systems. They document any adverse conditions discovered during the inspection or research process.
For properties 15 years old or newer, appraisers often assign "Not Updated" status unless major components have been replaced. Older homes might be classified as "Updated" if components have been refreshed to meet current market expectations, or "Remodeled" if significant structural or finish changes have been made.
The appraiser must report detrimental conditions even if they're typical for competing properties in the area. A neighborhood full of homes with aging roofs doesn't excuse your property's roofing issues.
When Properties Can Be Appraised "As Is"
Fannie Mae allows "as is" appraisals for properties with minor conditions that don't affect safety, soundness, or structural integrity. This covers normal wear and tear from aging and occupancy.
Examples of acceptable "as is" conditions include worn carpet or hardwood floors, minor plumbing leaks that don't cause structural damage, holes in window screens, missing handrails on interior stairs, or cracked window glass.
Properties rated C1 through C5 can typically be appraised "as is." The appraiser's value opinion reflects these minor conditions, often resulting in a slightly lower valuation than if the issues were corrected.
However, any condition that affects safety, soundness, or structural integrity requires a "subject to" appraisal, regardless of how minor it might seem. A loose handrail on exterior steps leading to the main entrance would likely trigger repair requirements, while a loose handrail on interior basement steps might not.
Special Issues: Infestation, Dampness, and Settlement
Three specific conditions receive special attention in Fannie Mae guidelines: evidence of infestation (particularly wood-boring insects), dampness problems, and abnormal settlement.
If the appraiser finds evidence of termites, carpenter ants, or other wood-destroying insects, they must comment on the effect on value and marketability. The same applies to moisture problems that could lead to mold or structural damage, and settlement issues that indicate foundation problems.
When these conditions are present, you have two options. You can provide satisfactory evidence that the condition has been corrected, such as receipts from a licensed pest control company or waterproofing contractor.
Alternatively, you can obtain a professionally prepared report from a qualified inspector stating that the condition poses no threat of structural damage. This inspection must be performed by someone with appropriate credentials and expertise in the specific issue.
Required Documentation and Evidence
When your property has condition issues requiring repair, specific documentation is necessary to satisfy Fannie Mae requirements. The type of documentation depends on the severity and nature of the problems.
For minor repairs that don't require professional expertise, photographs showing completed work and receipts for materials and labor are typically sufficient. The lender documents their decision and rationale in the loan file.
For more serious issues requiring professional evaluation, you need reports from qualified professionals. Structural engineers evaluate foundation and framing issues. Licensed electricians assess electrical problems. HVAC technicians handle heating and cooling system deficiencies.
These professional reports must specifically address the safety, soundness, and structural integrity concerns identified in the appraisal. Generic inspection reports that don't directly address the appraiser's findings may not satisfy the requirements.
Common Pitfalls and Complications
One frequent misunderstanding involves the scope of required repairs. Borrowers often assume they need to fix everything the appraiser mentions, but only safety, soundness, and structural integrity issues are mandatory for loan approval.
Cosmetic issues like outdated fixtures, worn flooring, or dated paint colors affect the property's value but don't prevent loan approval. Focus your repair efforts on items specifically identified as affecting safety or structural integrity.
Another complication arises when appraisers identify potential issues they're not qualified to evaluate. For example, an appraiser might notice staining that suggests a roof leak but cannot determine if structural damage has occurred. This triggers a requirement for professional inspection even if the actual problem is minor.
Timing can also create problems. Repairs must be completed before loan closing, and some repairs require permits and inspections that can take weeks to obtain. Plan accordingly if your appraisal identifies significant issues.
Finally, remember that condition and quality ratings are absolute, not relative. Your home's rating doesn't improve just because neighboring properties have similar issues. Each property is evaluated on its own merits according to consistent standards.
References
For the official guidelines, see B4-1.3-06: Property Condition and Quality of Construction of the Improvements in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B4-1.3-06, Property Condition and Quality of Construction of the Improvements (06/04/2025)
Appraiser Selection of Condition, Quality, and other Characteristic Ratings
Identifying Property Condition
Definitions of Not Updated, Updated, and Remodeled
Identifying Quality of Construction
Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject Property
Infestation, Dampness, or Settlement
Uniform Appraisal Dataset (UAD) 3.6 Policy
Appraiser Selection of Condition, Quality, and other Characteristic Ratings
The condition and quality ratings must be based on a holistic view of the property and any improvements. When selecting the condition and quality ratings, an appraiser must
consider all improvements to determine an overall condition and quality rating. The appraiser should select the rating that best reflects the property as a whole and in its entirety.
describe the subject property as of the effective date of the appraisal on an absolute basis, meaning the property must be rated on its own merits. The rating should not be selected on a relative basis, meaning it is not selected on how the property relates or compares to other properties in the neighborhood. Additionally, the condition and quality ratings for comparable properties must be made on an absolute basis (again, each comparative property on its own merits), not on a relative basis, and reflect the property as of the date of sale of that comparable property.
Note: These requirements also apply to all other ratings or descriptions, including the View and Location.
When an appraiser selects a rating and/or description of the subject property for a sales transaction, the selected rating and/or description must remain the same when reflecting that specific transaction. For example, if a C4 rating is selected for the sale of the subject property, then that property remains a C4 when using that specific sale as a comparable in future reports. The same expectation holds true for ratings and descriptions of comparable sales. When a comparable is used in a subsequent appraisal, the ratings and descriptions of that property should not change from one appraisal to the next when it reflects the same sale transaction.
Note: Properties can have the same rating or description and still require an adjustment. It should be noted this not only applies to condition and quality ratings but can apply to other ratings or descriptions as well. For example, all water views may not be equal. In this instance, an adjustment should be made and explained in the Additional Comments section of the form or in an addendum.
Property Condition
Lenders must take the necessary steps to confirm that a property meets Fannie Mae’s condition requirements as outlined in this topic.
The table below provides the requirements for property condition.
✓
Requirements
The appraisal report must express an opinion about the condition of the improvements based on factual data of the improvements analysis.
Appraisals based on interior and exterior inspections must include complete visual inspections of the accessible areas of the property.
Appraisal reports must reflect adverse conditions that were apparent during the inspection or discovered while performing research, such as, but not limited to, needed repairs, deterioration, or the presence of hazardous wastes, toxic substances, or adverse environmental conditions.
Detrimental conditions of the improvements must be reported in the appraisal even if the conditions are typical for competing properties.
The appraiser must consider and describe the overall condition and quality and condition of the property improvements. (See Identifying Property Condition; Definitions of Not Updated, Updated, and Remodeled; and Identifying Quality of Construction in this topic for details.)
The appraiser must identify
The appraisal Additional Comments section must address needed repairs and physical, functional, or external inadequacies.
Property Condition Ratings
For appraisals required to be completed with the UAD, the appraiser must assign one of the following standardized condition ratings in the table below when identifying the condition of the improvements for the subject property and comparable sales.
C1
The improvements have been very recently constructed and have not previously been occupied. The entire structure and all components are new and the dwelling features no physical depreciation.
C2
The improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. Virtually all building components are new or have been recently repaired, refinished, or rehabilitated. All outdated components and finishes have been updated and/or replaced with components that meet current standards. Dwellings in this category either are almost new or have been recently completely renovated and are similar in condition to new construction.
C3
The improvements are well-maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated. The structure has been well-maintained.
C4
The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate.
C5
The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs, rehabilitation, or updating. The functional utility and overall livability are somewhat diminished due to condition, but the dwelling remains useable and functional as a residence.
C6
The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness, or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many or most major components.
Identifying Property Condition
As previously noted, the condition rating selected for the property must reflect a holistic view of the condition of the property improvements. It would be inappropriate to select either a lower or higher overall rating on the basis of one or two minor inferior or superior areas of the property improvements. However, the C6 rating is an exception because it indicates that the property is impacted by one or more deficiencies that negatively affect the safety, soundness, or structural integrity of the property. As a result, if any portion of the dwelling is rated a C6, the whole dwelling must be rated a C6.
Loans secured by properties with a condition rating of C6 are not eligible for sale to Fannie Mae. Any deficiencies impacting the safety, soundness, or structural integrity of the property must be repaired with a resulting minimum condition rating of C5 prior to sale of the loan. See Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject Property in this topic for information related to completing appraisals on properties with safety, soundness, or structural integrity deficiencies.
Definitions of Not Updated, Updated, and Remodeled
For appraisals required to be completed using the UAD, as a subset of identifying the condition of the subject property, the appraiser must also identify the level of updating, if any, that the subject property has received by utilizing the definitions in the table below.
Not Updated
Little or no updating or modernization. This description includes, but is not limited to, new homes.
Residential properties of fifteen years of age or less often reflect an original condition with no updating, if no major components have been replaced or updated. Those over fifteen years of age are also considered not updated if the appliances, fixtures, and finishes are predominantly dated. An area that is ‘Not Updated’ may still be well-maintained and fully functional, and this rating does not necessarily imply deferred maintenance or physical/functional deterioration.
Updated
The area of the home has been modified to meet current market expectations. These modifications are limited in terms of both scope and cost.
An updated area of the home should have an improved look and feel, or functional utility. Changes that constitute updates include refurbishment and/or replacing components to meet existing market expectations. Updates do not include significant alterations to the existing structure.
Remodeled
Significant finish and/or structural changes have been made that increase utility and appeal through complete replacement and/or expansion.
A remodeled area reflects fundamental changes that include multiple alterations. These alterations may include some or all of the following: replacement of a major component (cabinet(s), bathtub, or bathroom tile), relocation of plumbing/gas fixtures/appliances, significant structural alterations (relocating walls, and/or the addition of square footage). This would include a complete gutting and rebuild.
Appraisals Completed “As Is”
Fannie Mae permits appraisals to be based on the “as is” condition of the property provided existing conditions are minor and do not affect the safety, soundness, or structural integrity of the property, and the appraiser’s opinion of value reflects the existence of these conditions.
Minor conditions and deferred maintenance are typically due to normal wear and tear from the aging process and the occupancy of the property. While such conditions generally do not rise to the level of a required repair, they must be reported. Examples of minor conditions and deferred maintenance include worn floor finishes or carpet, minor plumbing leaks, holes in window screens, missing handrails, or cracked window glass.
Properties with condition ratings C1, C2, C3, C4, and C5 as previously defined are eligible in “as is” condition. Properties with the initial condition rating C6 indicate one or more deficiencies that impact the safety, soundness, or structural integrity of the property. Therefore, the appraisal must be completed "subject to" completion of the deficient item(s) with a minimum resulting condition rating of C5.
See Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject Property in this topic for additional details when completing appraisals on properties with safety, soundness, or structural integrity deficiencies.
Quality of Construction Rating
For appraisals required to be completed using the UAD, the appraiser must assign one of the following standardized quality ratings in the table below when identifying the quality of construction for the subject property and comparable sales.
Q1
Dwellings with this quality rating are usually unique structures that are individually designed by an architect for a specified user. Such residences typically are constructed from detailed architectural plans and specifications and feature an exceptionally high level of workmanship and exceptionally high-grade materials throughout the interior and exterior of the structure. The design features exceptionally high-quality exterior refinements and ornamentation, and exceptionally high-quality interior refinements. The workmanship, materials, and finishes throughout the dwelling are of exceptionally high quality.
Q2
Dwellings with this quality rating are often custom designed for construction on an individual property owner’s site. However, dwellings in this quality grade are also found in high-quality tract developments featuring residences constructed from individual plans or from highly modified or upgraded plans. The design features detailed, high-quality exterior ornamentation, high-quality interior refinements, and detail. The workmanship, materials, and finishes throughout the dwelling are generally of high or very high quality.
Q3
Dwellings with this quality rating are residences of higher quality built from individual or readily available designer plans in above-standard residential tract developments or on an individual property owner’s site. The design includes significant exterior ornamentation and interiors that are well finished. The workmanship exceeds acceptable standards and many materials and finishes throughout the dwelling have been upgraded from “stock” standards.
Q4
Dwellings with this quality rating meet or exceed the requirements of applicable building codes. Standard or modified standard building plans are utilized and the design includes adequate fenestration and some exterior ornamentation and interior refinements. Materials, workmanship, finish, and equipment are of stock or builder grade and may feature some upgrades.
Q5
Dwellings with this quality rating feature economy of construction and basic functionality as main considerations. Such dwellings feature a plain design using readily available or basic floor plans featuring minimal fenestration and basic finishes with minimal exterior ornamentation and limited interior detail. These dwellings meet minimum building codes and are constructed with inexpensive, stock materials with limited refinements and upgrades.
Q6
Dwellings with this quality rating are of basic quality and lower cost; some may not be suitable for year-round occupancy. Such dwellings are often built with simple plans or without plans, often utilizing the lowest quality building materials. Such dwellings are often built or expanded by persons who are professionally unskilled or possess only minimal construction skills. Electrical, plumbing, and other mechanical systems and equipment may be minimal or nonexistent. Older dwellings may feature one or more substandard or nonconforming additions to the original structure.
Identifying Quality of Construction
The same approach used in identifying the condition of the property is also applicable to identifying the quality of construction. The selected rating must reflect a holistic view of the quality of construction. However, the Q6 Rating is an exception because it indicates that the property is impacted by one or more deficiencies that negatively affect the safety, soundness, or structural integrity of the property. As a result, if any portion of the dwelling is rated a Q6, the whole dwelling must be rated a Q6.
Loans secured by properties with a quality of construction rating of Q6 are eligible for sale to Fannie Mae provided any items in relation to the quality of construction that impact the safety, soundness, or structural integrity of the property are repaired prior to the delivery of the loan. See Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject Property in this topic for requirements when completing appraisals on properties with safety, soundness, or structural integrity deficiencies.
Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject Property
The appraisal report must identify and describe physical deficiencies that could affect a property’s safety, soundness, or structural integrity. If the appraiser has identified any of these deficiencies, the property must be appraised "subject to" completion of the specific repairs or alterations. In these instances, the property condition and quality ratings must reflect the condition and quality of the property based on the hypothetical condition that the repairs or alterations have been completed.
If the appraiser is not qualified to evaluate the alterations or repairs, the appraisal must note the deficiencies and be completed "subject to" a satisfactory inspection by a qualified professional. The lender must decide if the inspection(s) is required and whether the property meets eligibility requirements. If the property does not meet eligibility requirements, the lender must provide satisfactory evidence that the condition has been corrected or repaired prior to loan delivery. In this case, the appraiser is not required to review the professionally prepared report, re-inspect the property, or provide a Form 1004D. The lender must document the decision and rationale in the loan file. See
, for properties affected by environmental hazards.
Infestation, Dampness, or Settlement
If the appraisal indicates evidence of infestation (such as, wood-boring insects), dampness, or abnormal settlement, the appraisal must comment on the effect on the value and marketability of the subject property. The lender must either provide satisfactory evidence that the condition was corrected or submit a professionally prepared report indicating, based on an inspection of the property, that the condition does not pose any threat of structural damage to the improvements. The appraisal should be made "subject to" repairs or alternations, or "subject to" an inspection by a qualified professional.
Uniform Appraisal Dataset (UAD) 3.6 Policy
Lenders using UAD 3.6 must follow the requirements in the
.
