PACE (Property Assessed Clean Energy) is a program that launched as far back as 2001. In short, it is a program that is geared towards allowing homeowners to finance the costs of energy efficient improvements to their home. In the beginning stages of PACE, there was some confusion as to how this new incentive impacted home loans and refinances. Today, we will clear up many of the questions you might have about PACE as well as show you why PACE will have no impact on any future home loan refinancing.
PACE History…Why the Program Was Created
In 2008, Assembly bill 811 was passed. This bill focused on energy efficiency improvements. It allowed homeowners to finance these improvements through loans that would be repaid on the property’s tax bill. As a result, programs like HERO emerged. HERO stands for Home Energy Renovation Opportunity and is one of the financing opportunities that falls under the PACE umbrella. This began as a statewide program through California and is now gaining recognition nationwide with 30 states having similar opportunities available.
What and Who Qualifies?
To qualify for PACE financing, any home improvement has to be permanently attached to the home and the home has to be permanently attached to the foundation. In addition, the improvements must be providing an energy efficient solution that will help to reduce the home’s overall carbon footprint. If you want to know if improvements for you home qualify, you can request an Increase Clean Energy specialist to do a walk-through of your home to help identify areas where qualifying energy efficiency improvements can be made. They may point out things like upgrades to windows, exterior paint coatings like Coolwall®, high-efficiency insulation, and solar panel systems.
PACE differs from traditional contract financing where the borrower has to bring funds to the table. With PACE, financing can be up to 100% of the total cost of the improvement and does not rely on your credit history in order to obtain funds. PACE approval focuses on the equity and property value of your home to make a financing decision. In order to qualify, you must meet the following specifications:
- You must have at least 10% equity in your home.
- You must be current on your mortgage payments over the last 12 months.
- You must produce a clean Title report showing no property tax liens.
- If you have a bankruptcy on your credit record, it must have been discharged more than two years ago.
If you do have a bankruptcy on your record, they will look in more detail at your other credit to determine that you have successfully re-established your credit history. Just know that bankruptcy does not disqualify you automatically in many cases.
*Note: The City of San Diego and Chula Vista require a bankruptcy discharge of seven years or more.
How a PACE Loan Works
With a traditional home loan or home improvement loan, there is a lien put on your property. There are two different loan positions – a superior lien and a junior lien. The superior lien takes the first position. In the event of default on a loan, the superior lien holder will be paid first. A junior lien, which is common with a second mortgage like a home equity line of credit, takes the second position. When you sell your home, anything in the first lien position is paid off first.
With a PACE loan, PACE takes a superior lien position. This is why lenders look at PACE as a lien that could get in the way of a financing scenario. Conventional financing with a PACE loan in the first position is not available. PACE understands that this has been an issue in the lending world. As a result, PACE can subordinate and allow the lender to take the superior lien position so the loan can be approved. This option works as long as you don’t have more than one lien. This clears up any of the previous concerns and issues that lenders had in lending on properties with a PACE lien in place.
Final Verdict? PACE is a Smart (and Safe) Financing Option for Home Efficiency Improvements!
In conclusion, you can see that the previous concerns regarding PACE are unwarranted as many changes and improvements have been made since the bill was initially passed years ago. PACE is a great option to consider for financing energy efficient improvements to your home. A PACE lien can work in conjunction with normal financing and this should not limit you from going forward with conventional financing.