FHA to issue guidance on renewable energy upgrades

August 25, 2015

WASHINGTON (8/25/15)--A set of guidelines supporting borrowers looking to make energy-efficient home improvements is forthcoming from the Federal Housing Administration (FHA), the agency announced Monday.

Borrowers will be allowed to use Single Family FHA financing for properties with existing Property Assessed Clean Energy (PACE) loans that meet certain conditions.

The FHA's statement is consistent with the position of the California and Nevada Credit Union Leagues, who submitted comments to the Department of Housing and Urban Development (HUD) last week regarding consideration of "super priority" liens for energy efficiency loans from unregulated lenders.

The leagues requested that HUD and the FHA avoid using super priority liens when considering PACE loan policy, citing numerous consumer protection deficiencies and potential risks to regulated lenders such as credit unions.

PACE varies from state to state, but generally allows homeowners to finance energy efficiency improvements for up to 20 years through assessments attached to the property. This allows the homeowners to benefit from the improvements immediately while spreading the cost out over time.

When the property is sold, the PACE loan remains with the property, and the new owner becomes responsible for the loan.

Under the new guidance, lenders are allowed to evaluate the conditions under which borrowers purchasing, refinancing properties or modifying loans with existing PACE assessments will be eligible to use the FHA-insured financing.

Though the FHA will develop more specific guidance in the coming months, FHA financing may be used if the following requirements are met:

  • PACE liens that preserve payment priority for first-lien mortgages through subordination are eligible;
  • PACE assessments must be fixed-rate and on a fixed repayment schedule;
  • PACE assessments must be recorded and identifiable to the lender; and
  • PACE assessments must be attached to single-family properties, as defined by FHA, which are one- to four-unit dwellings.