Congenital hydrocephalus (CH) is a major cause of childhood morbidity. Mono-allelic mutations in Trim71, a conserved stem-cell-specific RNA-binding protein, cause CH, however, molecular basis for pathogenesis mediated by these mutations remains unknown. Here, using mouse embryonic stem cells as a model, we reveal that the mouse R783H mutation (R796H in human) significantly alters Trim71’s mRNA substrate specificity and leads to accelerated stem-cell differentiation and neural lineage commitment. The mutant Trim71, but not the wild-type Trim71, binds Lsd1 (Kdm1a) mRNA and represses its translation. Specific inhibition of this repression or a slight increase of Lsd1 in the mutant cells alleviates the defects in stem cell differentiation and neural lineage commitment. These results determine a functionally relevant target of the CH-causing Trim71 mutant that can potentially be a therapeutic target and provide molecular mechanistic insights into the pathogenesis of this disease.