How Will Solar Panel Installation Affect My Mortgage?
One of the most popular ways to reduce your energy bills and your environmental footprint is through the installation of solar panels.
Why not? Not only do homeowners reap the monthly energy savings, but they also may be eligible for sizable tax credits.
A residential federal tax credit of 30% will remain in place until December 31st of 2016 at least, but that’s not all. Some states and municipalities also offer separate tax credits on top of the federal incentives.
The National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and real estate giant Redfin have all released surveys indicating that solar panels increase the value of a home too.
For people who own rooftop power systems, solar does add to home value – about $25,000 for the average installation in California – according to the U.S. Department of Energy.
Unbeknownst to many homeowners, the method you use to pay for those solar panels can have serious implications if you want to sell or refinance though.
Implications that could sabotage your entire deal. Especially if the solar systems are leased.
Many would-be buyers get spooked by the terms of a solar lease because many real estate agents lack the capacity to appropriately explain them. Mortgage underwriters – the people in charge of approving your mortgage application – can also be wary of leased solar panels.
That causes increased documentation burden and – sometimes – denied mortgage applications.
It’s important to understand the pros and cons of installing solar panels, but more importantly how you pay for them and how that affects your mortgage application.
Solar Acquisition Types and Their Affect On Your Mortgage
Solar companies currently offer homeowners three methods of acquiring solar power.
If you have solar equipment you can absolutely expect additional documentation for underwriting regardless of how they were acquired. Be prepared for it.
Underwriters need to determine the effect on your debt-to-income ratio and any title or lien implications before they approve your mortgage application.
The three primary types of solar acquisition are:
- Solar Equipment Purchase – If the homeowner purchases the solar equipment, he or she may or may not have a debt associated with the solar equipment.
If the homeowner purchased the equipment outright without any financing, then they should be good-to-go. No DTI hit and no issues other than a providing a little extra documentation to prove full free and clear ownership.
If the solar equipment was purchased with an installment loan or 2nd mortgage, the debt must be included in the DTI unless the debt is being paid off. Some homeowners choose to include their solar panel debt in a cash-out refinance to do just that.
- Solar Equipment Lease – If the homeowner leases their solar equipment, the lease payment must be included in the DTI.
Leased systems are considered personal property rather than part of a house. That doesn’t mean their are no title implications though.
Many solar companies attach a UCC-1 to the title of the house. That rider says they can get their solar panels back – assuming they haven’t been paid off – in the case of a foreclosure.
Mortgage lenders view that as a lien typically. While that may not technically be true, it is what it is and will come into play on any potential refinance or home sale.
- Hybrid – If the homeowner enters into a contract to use energy generated by a solar company who has installed equipment on the homeowner’s property and they are only charged monthly for the use of solar energy in place of a utility bill to the utility companies, then no monthly debt is required to be included in the DTI.
One of the companies who offer this new hybrid solar use is SolarCity. They lock in a rate for 20 years and the borrower will only pay for the solar energy they use.
If you opt for a lease, understand your long-term obligations, and talk to your current utility company about the savings claimed.
Most important, if you’ve got a leased system and plan to sell or refinance, contact the leasing company well in advance to learn about the lease transfer and buyout options.
Ask a lot of questions before you pull the trigger on solar panels. That goes for those wanting to add them and those looking to buy a home with solar panels already installed.
Real estate and mortgage issues aside, solar panels do save money for many homeowners. Sometimes it’s negligible and sometimes it’s significant – it depends on where you live.
A few states, including Oregon and California, allow homeowners with large solar panels to essentially sell excess power to their local power company. That results in residential income of hundreds of dollars a year for the homeowner.
Not everyone can receive these “feed-in” energy credits, even in the states that allow them. It pays to check your local guidelines in addition to those of your mortgage lender.
Ultimately, due to the nature of the tax incentives for adding solar panels, it is also a good idea to bring in a tax professional.
While efficiency improvements have had a major impact in meeting national electricity needs relative to new supply, the demand for electricity continues to increase.
Overall, electricity consumption is expected to increase 45 percent by 2030. Inevitably, the price of energy will continue to rise with that demand. Solar panels are a good way to combat that – no doubt.
That said, we need to check ourselves and be cognizant of our energy use as well. Switching to renewable energy sources – like solar energy – is only just a small piece of the puzzle – reduced consumption is a much bigger piece.
If you live in a state with a suitable solar rating and can afford the initial investment, it’s well worth installing solar panels in your home while the 30% tax break is in place—for the good of the environment, but also for your wallet.
Just be aware of the potential mortgage implications that come with those solar panels.