As long as the damage has been treated this shouldn't be too big of an issue. I know that I wouldn't be overly concerned about it at least. If you are worried, you could always look for a professional opinoin. That should help you to know what you should do about it.
The borrowers can go to a different lender and get financing. Just because one lender does not accept the appraisal findings, does not mean another one will not. FHA appraisals are easily transferred to a different lender so all they have to do is reapply elsewhere. If as you say, the appraisal came in at or above value and is indeed an FHA appraisal, they should be able to get financing at another source without such strict underwriting overlays. It sounds as if they were the victims of an appraisal desk review, and it happens sometimes. Just don't give up on the borrowers and make sure your agent follows up to make sure they know they still have options.... more