There are many benefits of installing solar panels when you buy a home, from reducing your carbon footprint to boosting your new home’s value. But because installing a rooftop array can cost $18,000 to $20,000 before tax credits, you might need to borrow to make that happen. One option is to get a renovation mortgage.
How to Buy Solar Panels With Your Mortgage
A renovation home loan offers a way to pay for solar panels or finance other improvements on the home you’re buying by rolling the cost into your mortgage.
This involves taking out a first-lien mortgage — which is the loan you use to buy the home — for an amount that’s larger than the home’s price. The lender determines how much you can borrow based on the home’s expected value once the improvement is completed, rather than the home’s current value.
The difference between the loan amount and the home’s purchase price goes into an escrow account and is used to pay the contractor that does the work.
An advantage of using a renovation mortgage is that you can borrow against the property upfront, without needing to first make mortgage payments and build up equity.
“If you do a renovation loan, you’re getting the benefit potentially of having built-in equity to work with,” says Jim Bopp, vice president of national renovation lending at Planet Home Lending.
Types of Renovation Loans
You can finance a solar installation with a renovation loan backed by the Federal Housing Administration or with a conventional renovation loan.
Whichever loan program you choose, you have the option of a fixed-rate or adjustable-rate mortgage. Each of these loan programs allows up to 50% of the cost of materials to be paid upfront.
“It should be more enticing to the solar installer if they can get some of their material costs potentially before they show up to install everything,” Bopp says.
FHA 203(k)
The FHA 203(k) is an FHA loan that allows borrowers to buy and renovate a primary residence.
The standard 203(k) allows for major upgrades — such as installing solar panels — and there’s no cap on the size of the project. The loan can be as large as 110% of the home’s value after completion of the work. The total amount you borrow can’t exceed the FHA loan limit for your county, though, which is up to $498,257 for a single-unit property in lower-cost areas and up to $1,149,825 in more expensive areas. Also, your mortgage payment plus other expenses can’t exceed 50% of your income.
The FHA requires a consultant inspect the home and review the plans and cost estimates for the work. You’ll likely pay $1,800 to $3,000 for the initial consultation, plus $150 to $300 for additional inspections. This makes an FHA 203(k) a bit more expensive than conventional renovation loans, but you gain the benefit of extra oversight.
“They’re making sure that you’re not getting a contractor who’s going to run away with the money,” says Vickie Lasher, branch manager for American Financial Network.
The installation should be completed within six months. However, extensions may be given, particularly if there have been weather or supply-chain related delays, Lasher says.
FHA loan qualification requirements are a bit more forgiving than those of conventional loans. Borrowers with credit scores of 580 and above can qualify, and even those with scores as low as 500 can be approved under certain circumstances.
Fannie Mae HomeStyle
The Fannie Mae HomeStyle Renovation mortgage is a conventional home loan that can be used to add solar panels or a wide variety of other permanent additions to a home you’re purchasing.
Unlike with the FHA 203(k) loan, you’re not restricted to renovating a primary residence. “The nice thing about Homestyle is you actually can do it on a second home and an investment property,” Lasher says.
How much you can borrow depends on which type of property you’re buying and the type of mortgage. For a fixed-rate mortgage on a primary residence, you can borrow up to 97% of the home’s value with the renovation taken into account. If you’re also getting down payment or closing cost assistance through a Community Seconds loan from an affordable housing organization, you can borrow up to 105% of the home’s value between the two loans.
A HomeStyle mortgage must be no larger than the conforming loan limit for the county, which is up to $766,550 for a one-unit home in lower-cost areas and up to $1,149,825 in high-cost areas. Borrowers with credit scores as low as 620 can qualify in some cases. Debt-to-income ratio requirements are 36% or less, or up to 45% or less for those with higher credit scores and cash reserves.
This loan program doesn’t require consultants, but a qualified contractor must submit plans and specifications for the work. You have 15 months after closing to complete the renovations.
Freddie Mac CHOICERenovation
Like Fannie Mae HomeStyle, the Freddie Mac CHOICERenovation loan is a conventional mortgage for people buying a primary residence, second home or investment property.
If you’re buying a primary residence, you might be able to borrow up to 97% of the home’s value, taking into account the completed work. If you’re using an Affordable Seconds loan for down payment and closing cost assistance, you can borrow up to 105% of the home’s value. Your loan must fall within the conforming loan limit for the county.
Freddie Mac doesn’t publish debt-to-income ratio or credit score requirements for the CHOICERenovation loan, but borrowers have to be cleared by Freddie Mac’s automated underwriting system. You have 450 days to finish the installation under this loan program.
Other Financing Options
Taking out a renovation mortgage isn’t the only way to pay for solar. Here are some alternatives:
— Leasing. This involves paying a monthly fee to use the solar panels or paying for the amount of electricity they produce. You won’t own the panels unless you buy them when the lease is up. “They really need to look at that lease closely,” says Lasher. You might have to make payments for 15 to 25 years, and you’ll miss out on the tax incentives available if you had purchased the system. On the other hand, you might not have to worry about maintaining the system yourself, and you could still earn credits from your utility company if you generate more power than you use.
— Personal loans. An unsecured personal loan doesn’t put your home at risk if you can’t make the payments, and you get to own the system. But interest rates can be high, and you’ll likely have to pay the loan off if you sell the home.
— Home equity loans. A home equity loan is usually more affordable than a personal loan, but you may need to wait until you’ve built enough equity to borrow. The amount you can borrow with a home equity loan depends on the home’s current value, not on the value it will have when the work is completed.
— HELOCs. Like a home equity loan, a home equity line of credit would likely come with a lower rate than an unsecured personal loan. HELOC rates are variable, though. “You’re opening yourself up to increasing rates tied to whatever index, be it the prime rate or some treasury bond,” Bopp says.
[READ Best HELOC Lenders]
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Can You Use Your Mortgage to Buy Solar Panels? originally appeared on usnews.com
