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How Solar Panels Affect Debt To Income Ratios (DTI) For Mortgage Transactions – Home Purchasing and Refinancing
Mortgage Acuity
Mortgage Acuity
Published on June 8, 2022
Installing Solar Panels on the Tiled Roof of a Home

How Solar Panels Affect Debt To Income Ratios (DTI) For Mortgage Transactions – Home Purchasing and Refinancing

There are several different financing options for solar panels that both current and future homeowners need to be aware of.  The net effect of the associated monthly payments and resulting qualifying debt to income ratios can vary.

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OVERVIEW:

Solar Panel Financing Options:

  1. PACE | HERO | ELTAP:

         Effect on DTI for Refinance:

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  • NO – if solar loan is paid in full at or prior to close
  • YES - if solar loan is being paid inside the refinance

Effect on DTI for Purchase:

  • NO - solar loan must be satisfied by seller prior to sale
  1. Power Purchase Agreement (PPA):

Effect on DTI for Refinance & Purchase:

  • NO - monthly payments are treated as utility payments which are not included in the debt to income ratio
  1. Leased or Financed Solar Panels:

Effect on DTI for Refinance & Purchase:

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  • YES - typically, monthly payments must be considered in the debt to income ratio
  • NO – monthly payments can be considered utility payments only if specific agreement criteria are met (see below) and therefore not be included in the debt to income ratio

First things first – If you are thinking of refinancing or buying a home with solar panels already in place, make sure you ask if the panels are secured by any of the loans listed below. If they are, they will need to be paid in full prior to, or at closing, before you can complete a refinance or purchase transaction with mortgage debt:

PACE (Property Assessed Clean Energy)

HERO (Home Energy Renovation Opportunity)

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ELTAP (Energy Loan Tax Assessment Program)

Net Effect on Refinance Debt to Income for PACE, HERO or ELTAP Loans:

  • If the solar panels are paid in full with cash, i.e. not the equity in your home, at a refinance closing, the solar panels have zero net effect on the debt to income ratio, as there is no longer any monthly debt to factor into the debt to income ratio. 
  • If the solar panel financing is paid with the equity in the property at a refinance closing, this will increase the overall balance of the mortgage loan by the unpaid balance of the solar panel financing, which will increase the overall monthly payment of the mortgage loan, which ultimately increases the total monthly debt to income ratio.

Net Effect on Purchase Debt to Income for PACE, HERO or ELTAP Loans:

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  • The seller will need to pay off the outstanding balance on the solar panel financing prior to or at closing as none of the aforementioned programs allow the buyer to assume the seller's financing and therefore there is no net effect on the buyer's debt to income ratio.

Other than PACE, HERO or ELTAP, there are a few other ways solar panels can be financed:

Power Purchase Agreement (PPA)

Net Effect on Refinance and Purchase Debt to Income for PPAs:

Verify my mortgage eligibility (Sep 30th, 2022)
  • Because the monthly PPA payment is calculated solely on the energy produced by the panels, the payment can be treated as a utility payment and thus it can be excluded from the monthly debt to income ratio.  It should be noted that for a purchase transaction, the existing PPA will need to be assigned to or assumed by the buyer, which will require the buyer to be approved with the PPA company, or the equipment will need to be removed prior to the close of the sale.

Leased or Financed (to ultimately own) Solar Panels:

Net Effect on Refinance and Purchase Debt to Income for PPAs:

  • The associated monthly payments to the debt issuer, whether leased or financed, will be included in the borrower's monthly payments and therefore will have an effect on the total qualifying debt to income ratio, unless both of the following are met and the payment can be considered a utility payment and therefore not be included in the debt to income ratio:
    • Agreement must detail the delivery of a specific amount of energy at a fixed payment during a given period and;
    • Include a production guarantee that compensates the client in the event that the solar panels fail to meet the output required for the lease period

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