Financing Solar(PV) with the Energy Efficient Mortgage and/or the Full 203K
Energy Financing is an area that is full of confusion and misunderstandings; this is even more of an issue when it comes to Solar than any other segment.
Part of the issue is that many Loan Officers are just learning how these products work and are making statements that are not completely accurate as a result. There is a lot of misinterpretation regarding the Energy Efficient Mortgage (EEM), Full 203K loan, and the Streamline 203K loan. This has significant implications when it comes to Solar.
To make this very clear, Solar may be financed in the EEM and the Full 203K, but it cannot be included in the Streamline203K. Since very few Loan Officers have access to the Full 203K it is important that you locate someone who offers and understands that product.
One of the challenges with financing Solar has always been the restrictions that Appraisers have that generally limit their ability to recognize the full value the system adds. With the Full 203K the buyer can actually exceed the appraised value by 6.15% for their base loan. (In the case of a refinance, under some circumstances, the after improved appraisal can be exceeded by as much as 7.5%.) This is better than it sounds though, because they were limited to 96.5% if they were doing a basic FHA loan. Consequently, they are able to include almost 10% of the sales price or appraised value for a solar system without any additional value being factored in for the solar system.
If the Appraiser is able to give some value to the Solar System, this will increase the amount they can finance even further. By coupling a Full 203K with an EEM though, they can add another 5% beyond the appraised value for the Solar System. One additional benefit here is that the After Improved Value is used as the basis for the 5% allowed for the EEM. (Please refer to the EEM fact Sheet for additional information, considerations, and restrictions relating to this program.)
With an Energy Efficient Mortgage (EEM) up to 5% of the Sales Price (or Appraised Value if lower) may be added for qualifying energy upgrades. A HERS II audit must be performed to determine the projected energy savings in relation to the mortgage payment increase to accommodate this additional financing amount. The HERS II allows renewable energy sources to be incorporated.
When you combine the EEM with the 203K you can finance a pretty comprehensive Solar Package with no appraisal limitations and very little additional expense or up-front cost to the buyer. If this is done within the HERE model, the buyer could actually receive a rebate that is substantially greater than the additional amount they had to contribute. (Please remember that the information I am showing you here can be applied with or without the HERE model, but the specific requirements of the applicable utility provider must be met for the customer to receive the rebates under that approach.)
Let me give you a basic example; I am going to use the PG&E structure in this example. Without the PG&E rebates available within the HERE model I have spelled out on this site, everything else would still be applicable.
Without the Energy Package:
Sales Price $200,000
Required Down Payment $7,000
Minimum Appraisal Needed $200,000
With a $26,000 Solar Energy Package
Sales Price $200,000
Included in 203K $20,000
(Includes a Contingency Reserve for unanticipated costs)
Included in EEM $10,000
Required Down Payment $7,700
(100% of qualifying EEM items may be financed)
Minimum Appraisal Needed $200,000
Utility Rebate $4,000
(Based on meeting the energy reduction level required)
In this scenario the Buyer would have to contribute an additional $700 in Down Payment and there would slightly higher closing costs, but they could potentially receive $4,000 in rebate. This is not even considering the other rebates and tax credits that may apply. The appraisal would not have to be increased.
It is also important to consider that a contingency reserve amount has to be included in this for potential cost over-runs resulting from issues identified during installation. Any Contingency Reserve funds not utilized will be used to reduce the principal balance of the buyer’s loan or may be used for additional work under some circumstances. In this example, the actual bids without the contingency would have to be around $26,000. If the Appraiser gave even $10,000 in additional value, $9,650 0f that amount could potentially also be financed.
On a $300,000 Purchase the amount of actual work that could be financed could potentially go to $39,000 dependent upon the maximum allowable FHA Loan for your area and the buyers qualifying capacity.
It is true that HUD has special provision that allows an increase in the maximum loan amount under some circumstances if Solar is being included. The criteria for this provision israrely, if ever, going to be applicable for all practical purposes.
Important Considerations regarding financing Solar:
The Energy Efficient Mortgage has specific requirements regarding the projected monthly energy cost savings in relation to the increase in the mortgage payment. It is possible, particularly in areas where the cost of power is lower, that a Solar System may not qualify under this criteria for an EEM. This restriction does not apply to the Full 203K.
Although the above models offer significant advantages on their own it is important to note that a Solar System may or may not meet the criteria for the stimulus program rebates. There are specific requirements related to stacking order considerations within those programs that will apply.
Sacramento 1st DBA Comstock Mortgage – Lic : 01390474
Kevin Nunn – NMLS 305826 / DRE 01158674
