Solar power is gaining momentum in the U.S., and we’re moving towards incorporating this cleaner, more efficient source in many areas of our lives, including our homes.
Solar energy technology has come a long way in the last 100+ years: solar cell technology was first produced in the late 1800’s, and solar panels as we know them today were created in 1954. Solar power has been part of some amazing feats, including the first round-the-world solar-powered flight in 2016 and the construction of the largest solar-powered railway bridge in London, England.
The good news is solar power has become more accessible to the average consumer, and more homeowners are incorporating solar panels into their homes. In the U.S., California is leading the pack with over one million solar units installed in homes as of 2019. This number is growing, especially with California legislation requiring most new construction homes, built January 2020 and onward, to incorporate solar energy measures. Many states have incorporated solar power into their legislation, as well.
Whether you’re originating or underwriting loans in California or other states with a strong solar power presence, there are some questions to consider when gathering data during the processing of the file.
Questions to Ask When Originating or Underwriting a Home with Solar Power
When your borrower is considering purchasing or refinancing a home with solar panels, there are some specific questions you’ll want to ask up front.
What is the ownership and debt financing structure of the solar panels?
If the borrower owns, or will be the owner of the solar panels (cash purchase; included in the purchase price; financed previously and now paid in full OR secured by the first mortgage) you will typically be able to verify via title and solar-related credit report debt. The solar panels may be included in the value.
Are the panels leased or owned outright?
You will want to obtain a copy of the Power Purchase agreement or lease agreement. If you’re looking at a property with leased panels, the value of the panels may not be included in the appraised valuation.
Further, if the panels are leased, you’ll need to determine the monthly payment amount and incorporate that amount into the ratios unless the lease provides delivery of specific amount of energy at a fixed payment during a given period and has a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet energy output required during the lease period.
Does the home maintain access to electrical utilities consistent with community standards?
This answer must be “yes” in this case.
Is there a Property Assessed Clean Energy (PACE) loan?
If the PACE loan is structured as a subordinate lien or unsecured loan, it may be GSE eligible. If the PACE loan is not expressly subordinate, it is ineligible. PACE loans dated prior to July 6, 2010 may also be eligible. Click here for more information.
Is the Solar Panel loan unsecured?
If so, obtain the invoice to verify solar panels were installed at the subject property site.
Check the Appraiser’s Requirements
In addition to the above questions, you’ll want to ascertain the appraiser has accurate information about the ownership structure of the solar panels to:
- Review the complete contract and comment on the terms
- Be familiar with energy reports and ratings and include the information in the report
- Provide comparable sales to support, if available
- If no similar sales are available, the income approach, cost analysis, discounted cash flow or market surveys may be appropriate.
Be Flexible When Underwriting the Collateral
One final recommendation is to remain open-minded when considering appraisals which may lack solar panel comparable sales. Some markets just may not have sales with similar energy sources during this time of solar growth.
If you have any questions regarding underwriting properties with solar panels, or other interesting scenarios, please reach out to your Enact Regional Underwriting team to discuss them. We’re always happy to assist you!
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Donna Muratalla is Enact’s Pacific Northwest Regional Underwriting Manager. She is a Certified Residential Underwriter with 27 years in the MI industry. She specializes in HFA and Risk review.