California recently passed a new state law requiring all newly constructed homes to utilize solar energy by 2020. Whether you’re considering solar because of a law change, a desire to go green or to save some green in your pocket book, it can have an impact on your home financing.
If you’re considering solar panels on your home, here’s what you need to know about the potential impact on your ability to buy or refinance a home.
What If I Own My Own Solar Panels?
The easiest scenario is if you own your own solar panels outright. In this case, there are no implications for your mortgage. Your home financing can proceed as normal.
If your solar panels still have a balance, if your solar panels are leased or if you have a power purchase agreement, getting a mortgage is absolutely doable – there are just some things you need to know.
Solar Power Liens and Your Mortgage
If you previously bought solar panels and are in the middle of paying off the balance, there could be a lien on the house until the panels are paid off.
If there’s a lien in place while you’re paying off your solar panels, the solar panel balance is included in your loan-to-value (LTV) ratio, which could impact the amount of equity you have in a refinance or the amount of your down payment in a purchase if the solar panel contract is being transferred.
If you do have a lien for your solar panels, it has to be able to be subordinated. This means that in the event of foreclosure, your lender or mortgage investor gets the first payment from any foreclosure sale. More on that below. Keep in mind that many energy-based loan programs like HERO, ELTAP and PACE loans cannot be subordinated. Quicken Loans and many other lenders won’t finance homes with these types of loans.
Qualifying for a Mortgage with a Solar Panel Lease Payment
If you’re making a lease payment every month for your solar panels, this is generally included in your debt-to-income (DTI) ratio for mortgage qualification purposes.
There are a couple of exceptions to this rule:
- If the agreement guarantees a specific amount of energy over a given time frame and compensates the client if the solar panels failed to meet those goals, it can be excluded from DTI.
- The lease or purchase power agreement can also be excluded from DTI if the client pays a rate based on usage of the property. This is treated like a utility.
Contract Clauses to Watch For
If you’re leasing solar panels or entering into a purchase power agreement, there are some things you need to watch out for.
First, your solar panel manufacturers need to be clear about what happens in the event of a foreclosure. The contract has to give the mortgage lender the ability to do one of the following:
- Request that the solar panel manufacturer terminate the lease and take back the panels
- Transfer the lease agreement into the lender’s name without a transfer fee
- Enter into a new lease with equal or better terms
On FHA loans, there are a couple of additional provisions. The lease agreement can’t have anything in it that would hinder the transfer of ownership or limit the amount of sale proceeds you can get. You can’t be restricted in who you can sell to. Finally, there can’t be any mortgage acceleration or interest rate increase clauses.
On conventional and jumbo loans, in order to protect both you and the lender, there has to be a provision in the lease or purchase power agreements that states that any damage resulting from installation, malfunction or manufacturing defects has to be repaired by the owner of the panels to return them to their prior condition.
Are you interested in buying or refinancing your solar-powered home? You can get started online with Rocket Mortgage ® by Quicken Loans. You can also talk to one of our Home Loan Experts by calling (800) 785-4788. If you have any questions, you can leave them for us in the comments below.
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