The Truth About PACE Loans
I wanted to talk today about something extremely important, one of those “sounds too good to be true” type of things. This is not just impacting homeowners here in Florida, but across the country.
PACE EXPLAINED What I am about to tell you is a nationwide program, approved in most states, and it’s referred to as PACE, which stands for the Property Assessed Clean Energy financing program. Now, this is a government-approved program and it’s NOT a traditional loan. In fact, they don't have to follow traditional mortgage consumer protection guidelines, like TILA & RESPA. This PACE program is getting a lot of homeowners in muddy water and its a bit unsettling to hear what’s happening.
FROM RICHES TO RAGS Upfront, it sounds great! The PACE funding agency says their loan is a way for qualified property owners in program eligible communities to finance energy efficiency, renewable energy, and wind-resistance improvements through a long-term property assessment. So what is happening is some contractors are soliciting business- going to door-to-door, calling people’s homes, offering their services for these big-ticket home improvements, under the guise of “you don’t have to pay now, it just goes on your tax bill”. What’s happening is homeowners who are misinformed are signing contracts for these huge projects and then are surprised to see enormous assessments on their tax bill that can last to upwards of over 20 years!
Not only that- but with the program interest and minimal checks & balances, some contractors are charging more for these projects than they should. With those two factors in play, homeowners can massively overpay. For example, a woman in Pasco county last year was told her new roof would be around $13,000 with this program. In the end, the ultimate cost of her PACE loan was over $56,000. Another resident in Collier County, ended up with two PACE loans on his home- for a roof & AC, totaling $49,000.
Over the payback period, which can outlive the life of the home improvement, and even the HOMEOWNER in some cases, borrowers can expect to repay TWICE over the actual project cost.
So they call these “loans” but they are in actuality tax liens.
HOW YOUR HOME IMPROVEMENT PROJECT MAKES YOUR HOME UNABLE TO QUALIFY FOR A LOAN This creates another issue: SELLING the home. PACE says the assessment balance can transfer with the property however the reality is, any buyer obtaining a mortgage insured by Fannie Mae or Freddie Mac, as well as a VA or FHA loan, isn’t going to be able to secure a mortgage on the property unless the tax liens are paid off. That means a buyer is going to have to pay cash for the property or find a private lender who doesn’t write loans backed by Fannie/Freddie and usually charge very high-interest rates. Both of these scenarios are rare and limit your ability to sell the home to the majority of home buyers.
The alternative is, the homeowner will need to pay off the tax lien before closing. In many circumstances, sellers are either coming to the closing and ending up having no profit, as the tax lien ate up all their equity OR, worse, they are writing a check at closing, after no profit, to pay off the lien.
For those who are not aware- VA, FHA, Fannie, & Freddie will NOT insure mortgages with PACE liens. They will not insure the mortgages because those liens go to the front of the line for repayment since they are a tax if a borrower defaults.
This is starting to become an issue in the real estate market. Many homeowners don’t realize they have these huge tax assessments on their home so when they are about to close an issue comes up with the Title search. The issue is PACE loan. Often the deal falls apart when the seller can’t, or won’t, pay off the lien and the buyer’s lender can’t insure the loan. The trickle down effects of this can be massive.
In any case, make sure you always do your research before agreeing to anything like this and make sure you check with a qualified, INFORMED Realtor or Mortgage lender, before you do a project like this on your home if you plan on selling in the near future.
If you have any questions or are looking to buy, sell, or invest in the greater Tampa/St. Pete areas you can reach me at 813-539-1678 or on Facebook & Instagram at Let’s Talk Tampa.