Here are 2 nasty words that spell disaster for a loan: UNACCEPTABLE COLLATERAL. Do you know what this means? It means the borrower qualified for the mortgage, but the property did not. To our clients, however, a turn down is a turn down. They still take it very personally, even though they shouldn't.
Those that apply for mortgage loans simply do not understand that lenders now scrutinize properties as closely as they do borrowers. Maybe even more closely. Each property is viewed from this perspective: "How easy will it be to market this property once it is a foreclosure?"
Last week I had a loan turned down for UNACCEPTABLE COLLATERAL. The following comments came to me in writing from the bank upon the final review of the appraisal: " I don't like this property. I question the marketablity. The ceilings in the kitchen are low, and there are bars on the windows. The comparable properties are not close enough to the subject property. I am turning this down."
The file was 3 inches thick because lender went through 2 rounds of conditions before the borrower was approved. They took one last look at the appraisal and decided they did not "like" the property.
Please note that no where did the reviewer question the value listed on the appraisal. Loan to value on this loan was 67% and the property was in a lovely semi rural area where there are many retirement homes, and very little turn over. Owners had installed quick release bars because many tools were stored in at the property.
As many times as I TRY to explain the concept of YOU were approved, but THE PROPERTY was not, there is still that hurt silence on the other end of the phone (I never give turn down news via e-mail or voice mail).
To protect yourself from having property declared "unacceptable collateral" by a lender :
Do not use any verbage in the contract about "repairs to be made"
Do not mention "Items to be completed"
Do not include personal property as this dilutes the value of the home.
Never use this phrase "unpermitted area"
If part of the home is rented, do not mention this in the contract. Lender may assume a multi unit property
Note: Bars on windows need to be removed prior to the appraisal or must be mentioned in the appraisal as having safety releases.
I have adopted the following policy:
Read the appraisal and look for red flags. LOOK AT ALL OF THE PICTURES and look for red flags. Question unfiinished projects and areas in obvious need of repair. Look at all of the comps. Understand the property as well as you understand the borrower and be prepared to take an offensive approach when the appraisal goes to review.
Your loan may depend on it.
Written by Janet Guilbault, Mortgage Lending Expert Based Out of the San Francisco Bay Area
Janet Guilbault, California Mortgage Expert 
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Janet - Come to think of it, there's the 1003 Application and another application that should be implemented (at least in any Mortgage Professional's mind), that of the collateral being lended against.