The Federal Housing Administration (FHA) will now begin to insure mortgages for purchasing or refinancing residential properties with Property Assessed Clean Energy (PACE) assessments pursuant to a guidance dated 19 July 2016.
This is in line with FHA’s earlier support for the use of PACE financing to fund energy efficiency improvements to homes, and a broader effort by the U.S. Government to promote a cleaner and more energy efficient America.
Combining FHA’s low down payment loans with benefits derived from PACE-funded projects is definitely a win-win situation for everyone! We shall now discuss what is PACE about and how you can benefit from its tie-up with the FHA.
What Are PACE Loans
PACE is an innovative tool that helps residential and commercial property owners afford the costs of renewable energy (RE), energy efficiency (EE) , or water efficiency projects. PACE covers 100 percent of the costs of such energy improvement undertaking, which may be funded by private enterprises in partnership with local and state governments.
These costs will then be repaid by the property owners over a certain period of time, e.g. 20 years through assessments included on the property’s tax roll. A PACE assessment is a debt of property; the assessment will stick to the property once it gets sold and will then be repaid by the buyer of the property.
The first PACE program can be traced back to California’s Berkeley City in conjunction with San Francisco Bay Area’s climate program. California passed the very first legislation to enable PACE financing and launched the BerkeleyFIRST program, which paved the way for the PACE financing model and now concluded, in 2008.
Since then, 31 states and DC (District of Columbia) have enacted legislation to enable their own PACE financing programs. PACENow, a movement that promotes the widespread use of PACE throughout the U.S., has tracked the relevant programs per state here
Kinds of PACE Loans
PACE programs provide energy funding to residential or commercial properties that have some equity and have not been delinquent on their mortgage or property tax payments.
PACE for homes is one of the more viable ways to finance energy improvements. It helps homeowners overcome upfront costs, considered as a significant barrier to expensive energy retrofits.
The way PACE works is that you derive benefits from the home improvements, such as lower utility costs and then pay off the assessments for as long as you occupy the property.
Examples of energy improvement projects you can do using residential PACE financing are:
- Adding attic insulation
- Installing rooftop solar panels
- Improving heat and cooling systems
- Weather sealing
Through PACE financing, building owners can make their commercial spaces more eco-friendly and sustainable. Commercial PACE allows the costs of an energy upgrade to be repaid by and shared among tenants in the building.
These upgrades may be solar panels, insulation, water pumps, lighting improvements, and cooling and heating systems applicable to industrial, commercial, agricultural and non-profit structures.
Commercial PACE financing is available in 29 states and DC (District of Columbia) and in over 1,000 municipalities throughout the U.S. Property owners and real estate developers often note of how PACE financing has increased the property’s value and marketability and provided for positive cash flows.
Residential PACE Loans and FHA
Obama Admin’s Action Plan Towards Clean Energy
The obligations arising from PACE are repaid through tax assessments on the property. In 2010, the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, voiced its concern regarding PACE’s super lien status, which would allow PACE assessments to be paid out ahead in the event of default.
The FHFA called on a “pause” to the implementation of PACE programs pending concerns regarding the lien status, size, and duration. In separate letters to lenders in 2010, Fannie Mae and Freddie Mac said an energy-related lien like PACE may not be senior to any mortgage delivered to either Fannie or Freddie. These actions somewhat stalled the rise of residential PACE programs in the U.S.
Then came President Obama’s announcement on August 24, 2015, showing support for PACE as part of his overall plan to address climate change and transition into a cleaner and more energy efficient America. The President reiterated his support for PACE financing in a July 19, 2016 statement.
In both statements, the FHA is tasked to “unlock” residential PACE financing for single-family homes. This action is deemed to “remove existing barriers” on the use of residential PACE financing.
FHA’s Guidance on PACE Financing
The FHA is now accepting purchase or refinance applications in states where PACE obligations are treated as special assessments like property taxes.
The FHA’s guidance released on July 19th sets out how it will insure mortgages pertaining to homes with outstanding PACE assessments. Under the new guidance, the FHA will not allow PACE obligations to have “prime” or priority status over FHA’s mortgage lien. Lenders will be responsible for escrowing PACE payments to protect FHA from the “risk of losing collateral in a tax sale.” The FHA also requires appraisals to take into account PACE-related improvements and special assessments on the property and their value.
As early as August 2015, the FHA said it will allow for the purchase and refinance of properties with subordinated PACE loans using its insured mortgages. The agency also set certain conditions for eligibility, including but not limited to PACE liens must preserve payment priority for FHA first-lien mortgages; they should attach to single-family homes as defined by the FHA; and they must be formally recorded and identifiable upon a title search.
DOE PACE – FHA Partnership
To ensure that PACE-funded projects continue to be energy efficient, the FHA will use Home Energy Score, a DOE-approved, reliable and low-cost method to estimate a home’s energy usage. The FHA will come up with flexible underwriting terms to recognize the reduced costs of utilities when the Home Energy Score is used.
For homes that will receive a six or higher, FHA will provide a two-percent point “stretch ratio”. This means that the borrowers will qualify for a slightly higher loan amount when they purchase or refinance a home using FHA loans.
In connection with the FHA’s July 19 guidance, the Department of Energy is updating its Best Practice Guidelines for Residential PACE Programs, which may be used by counties and states to align with their consumer protection laws. The original Guidelines for Pilot PACE Financing Program released in May 2010 offers recommendations regarding acceptable PACE programs like financing of PACE projects that are cost-effective and reduce energy requirements as can be measured using DOE-approved methods.
What Are the Benefits of FHA PACE Loans
By allowing the purchase or refinance of homes with PACE using FHA loans, more households can live in better and energy-efficient homes at lower costs. As the FHA has recognized, homeowners get to benefit from PACE improvements that take effect immediately and whose costs spread over time.
By applying for FHA PACE loans, you get to take advantage of two sets of benefits:
On PACE’s side, how does it help homeowners?
- Investment: Spending money on energy improvement projects is financially sound, especially if means no out-of-pocket expenses. You pay less on electric bills and save more money as you go.
- Value: The improvements will add value to your property and stay with it for you and its future owners’ benefit.
- Sustainability: An eco-friendly home contributes to a more sustainable community.
Why buy homes with PACE loans using FHA loans?
- FHA loans are available for purchase or refinance of properties.
- They are known for their easy-to-qualify and flexible requirements.
- Down payments could go as low as three and a half percent and may be funded by friends, relatives or institutions approved by the FHA.
- Requires a credit score that is often lower than asked for conventional loans.
Where to Find an FHA PACE Lender
Consider this: PACE loans help homeowners afford costly energy-related improvements and FHA loans help you buy a home with PACE-funded projects.
Buying an energy-efficient home is a good investment and you may do so using FHA loans. We can connect you with a local lender to know if a property is eligible for an FHA loan and requirements to qualify for that loan.
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