Written By: Angelique Jackson, Op-Ed Writer
Last week we covered the different types of financing available for solar panels such as a Solar Lease, Power Purchase Agreement (PPA), a Solar Loan and the Property Assessed Clean Energy (PACE) program. With a Solar Lease or Solar Loan, the lease/loan payments are included in the DTI (a solar loan payment is added to the PITI as subordinate financing), while payments for a PPA are excluded from the DTI since the homeowner only pays for the energy that was produced.An exception to the lease payment being included in the DTI would be if the lease was structured to provide delivery of a specific amount of energy at a fixed payment during a given period, and has a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet the energy output required for in the lease for that period. The PACE program allows financing for a solar system and energy efficient improvements/upgrades. The homeowner pays back the loan over an assigned term of years through their property taxes. The PACE assessment is attached to the property rather than to the homeowner, making it easier for homeowners to purchase a solar panel system. Now let’s talk about the requirements needed when reviewing the lease/agreements, appraisal, insurance policy and title.
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When reviewing a Solar Lease or PPA, the lease/agreement must indicate that the solar panels are removable without causing damage to the subject property and that damage that does occur as a result of the removal of the solar panels is the responsibility of the owner of the equipment and the owner must be obligated to repair the damage and return the improvements to their original condition. Fannie Mae recently added specific foreclosure verbiage that should be reflected in the lease/agreement. You will most likely not find this foreclosure verbiage within the body of the lease/agreement, you will need to contact the solar company and have them provide a letter or addendum to the lease/agreement that reflects the following:
• the lender may terminate the lease/agreement and require the third-party owner to remove the equipment
• the lender has the right to become the beneficiary of the borrower’s lease/agreement with the third party without charge; or
• the lender has the right, but not the obligation, to enter into a new lease/agreement with the third party, under terms no less favorable than the prior owner.
• Note: Any lease/agreement in which the lender is a party in connection with a foreclosure (whether as beneficiary or direct party), must also be assignable to a subsequent purchaser of the realty from the lender. In addition, the lender must also have the right to terminate the lease/agreement and require removal of the equipment (for example, if the third party places restrictions on the assignment to a purchaser)
Overall, the lease/agreement must not cause an issue with conveying (ownership transfer) the property. These requirements do not apply if the solar panel is owned.
Appraisal Requirements: The appraiser must identify the property energy–efficient features. Energy-efficient property uses must be consistent with area in which the property is located and meets community standards. The appraiser must comment on any effect to value or marketability and must make appropriate adjustments to reflect the market reaction to the energy-efficient features. The appraisal should show that the property has access to traditional electric utilities. There must be a backup in the event the solar panel is defective or does not produce the amount of energy intended. For a lease or PPA the appraisal must reflect no value given to the Solar Panels. For a loan or if the system is owned, the appraisal can give value to the solar panels. For each scenario above, if the product is a DU Refi Plus, LPOA, FHA Streamline or VFA IRRRL with no appraisal, the borrower must provide certification that they have access to public utilities and a photo of the meter.
General Liability Insurance Requirements: The owner of the solar panels has a general liability insurance policy that covers damage to the mortgaged property caused by faulty installation, malfunction, or other manufacturing defects, whether or not covered by the warranty. The owner of the solar panels should not be named as a loss payee (or named insured) on the borrower’s property insurance policy. These requirements are not applicable, if the solar panel is owned.
Borrower’s Homeowners Insurance Policy Requirements: When reviewing the borrower’s homeowner’s insurance policy, the underwriter needs to ensure the policy does not exclude coverage for any tort liability the borrower may have under the contract with the owner of the solar panels (ex. direct damage) and does not exclude coverage for losses to the insured premises by reason of the presence of the solar equipment. Now you may be reading this and wondering where you would find this information? The short answer is to get a copy of the homeowners policy, however, you typically won’t see anything regarding this unless you get the full homeowners policy that list out all exclusions and inclusion within the policy.
Title Requirements: For Solar Leases and PPAs, title will reflect a Uniform Commercial Code (UCC) financing statement or Notice of an Independent Solar Energy. A UCC termination or release of the Notice of an Independent Solar Energy is required to ensure the lender will be in first lien position. For a Solar Loan, title will reflect a lien recorded against the property. The Solar Company or Lender providing the financing must provide a subordination agreement. If a solar panel system is owned outright by the homeowner, title will reflect no lien or UCC filing recorded against the property. Overall, you want to ensure title does not reflect any liens related to the ownership or maintenance of the solar panels that will result in a lien superior to the lenders first position. Any exceptions to the coverage on the title insurance policy for recorded instruments relating to the solar panels must comply with the conditions set forth in the FNMA Sellers Guide B7-2-05, Title Exceptions and Impediments. There should be no issue that would impede conveying the property.
Property Purchased with Existing Solar Panels: If your borrower is purchasing a home with existing solar panels, they will need to be credit qualifying with the solar company or lender so the seller can sign a transfer agreement for the borrower to assume all of the rights and obligations under the lease. The underwriter will need to obtain the Solar Power Purchase Agreement that the Seller(s) entered into plus, a Transfer Agreement executed by the Solar Company, Seller(s) and Borrower(s).
While this is not an all-inclusive list of requirements these are main documentation requirements for solar panels as they apply for Fannie, Freddie and Government loans. Please refer to the program’s guide/handbook for more details.
About The Author
Angelique Jackson has had a passion for the mortgage business for the last 14 years holding various positions in the industry including customer service, closing, processing, underwriting, loss mitigation, Operations Manager and VP of Compliance and Training. She has helped open operations centers and has trained over 1200 students nationwide. She currently serves as the Senior Credit Trainer for a major mortgage lender and instructor at Mortgage University. She is a bibliophile who enjoys learning about almost everything, and when not being a nerd, she loves attending Cleveland Cavaliers basketball games (she is a season ticket holder), spending time with her two goddaughters and traveling.