Quicken Loans: Solar Panel Leases Can Affect Mortgage

June 18, 2018 — 3:00 PM EDT

Solar panels are growing in popularity as more homeowners are able to finance or afford this way of providing power to their homes. But while they could cut a homeowner's utility bill, solar panels can also have implications on a mortgage, particularly if the panels are leased rather than purchased outright.

This could become a topic of growing interest if more states follow California and require all new construction homes to use solar energy by 2020. As a result, Quicken Loans, the home lender, said the easiest scenario is to own the panels outright. After all, this would mean there are no implications to the mortgage, and the home financing process can proceed as normal. But for those that are leasing the panels or have a power purchase agreement, it gets a little more complicated, although not insurmountable, when transferring homeownership.  

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"If you previously bought solar panels and are in the middle of paying off the balance, there could be a lien on the house until the panels are paid off," Quicken Loans wrote in a recent post. "If there's a lien in place while you're paying off your solar panels, the solar panel balance is included in your loan-to-value (LTV) ratio, which could impact the amount of equity you have in a refinance or the amount of your down payment in a purchase if the solar panel contract is being transferred."

If there is a lien because of the solar panels, the lender said it has to be subordinated, which means that, if there was a foreclosure, the lender or mortgage holder would get the first payment on any foreclosure sale. The mortgage company noted that many energy-based loan programs aimed at making homes more green – including  HERO, ELTAP and PACE – cannot be subordinated, which means that Quicken Loans and lots of other lenders won't finance homes with those loans.

As a result of all that, Quicken Loans said to make sure that the maker of the solar panel is clear about what happens if there is a foreclosure. The contract should clearly give the mortgage lender the ability to request the manufacturer terminate the lease agreement into the lender's name without a fee or enter into a new lease agreement that has equal or better terms. If it's a Federal Housing Administration loan, there can't be anything in the lease agreement that would prevent the transfer of ownership or affect the sale proceeds. What's more, there can't be any restrictions on who you sell to or any mortgage acceleration or interest rate increases.