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Financing for energy improvement loans now easier to obtain

Residential properties encumbered with a Property Assessed Clean Energy (PACE) obligation are now eligible for FHA-insured mortgage financing.

The change applies both to new purchases and refinancing, under a guidance issued in September by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).

PACE is a popular program that provides an alternative way to finance energy improvements to properties, such as energy efficiency, water conservation and renewable energy upgrades. The financing is provided by private entities in connection with state and local governments.

It allows owners of property, including residential, industrial, commercial, non-profit and agricultural property, to pay for such things as solar panels, insulation, new heating and cooling systems, lighting improvements and water pumps. It’s great for governments, too, because it encourages investment in their communities, creates jobs and improves the environment.

The program is in place in 32 states and the District of Columbia, though it isn’t active in all of those areas.

The new guidance makes obtaining the benefits of a PACE loan even easier for homeowners and will likely cause more municipalities to pass legislation to make the program available for residential properties. The one caveat is that it doesn’t apply to loans from the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.

Under the FHA guidance, only delinquent PACE payments will take priority over a mortgage. Further, the guidance says that delinquency on a PACE obligation cannot trigger acceleration of the entire loan.

If a home with a PACE obligation is sold, the new owner will become responsible for outstanding PACE payments. As part of the sale, the contract must state whether the seller will satisfy the PACE obligation or whether the obligation will remain with the home, as well as the details of the obligation. The appraiser must then report on how the PACE improvements have affected the property value.

If there is a foreclosure on the home, priority for delinquent payments can be waived or relinquished by PACE administrators or municipalities.

In order to be eligible for FHA-insured mortgage financing, the lender must meet certain criteria, including that it must treat the loan as a special tax assessment, record it in local property records and indicate that the property will freely transfer when the property is sold.

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