PACE Liens and Mortgages: Why Solar Financing Can Kill a Purchase or Refinance

Property Assessed Clean Energy financing -- commonly called PACE or HERO loans -- allows homeowners to finance solar panels, roofing, HVAC systems, and other energy improvements and repay the cost through a special assessment on their property tax bill. The critical issue for mortgage lenders is that PACE assessments are recorded as senior liens against the property, taking payment priority over first mortgages.

How Lien Priority Works

In most states that allow PACE financing, the assessment is structured as a super-priority lien that takes precedence over the existing first mortgage in a foreclosure. This means a first mortgage lender who forecloses on a property with a PACE lien may still be subordinate to the PACE assessment for the outstanding balance. This directly conflicts with the fundamental requirement that a first mortgage be in first lien position.

Fannie Mae and Freddie Mac Restrictions

• ✦Fannie Mae and Freddie Mac will not purchase loans where the subject property has an outstanding super-priority PACE lien
• ✦Properties with subordinate-lien PACE structures may be eligible if the PACE lien does not have payment priority over the first mortgage
• ✦Title insurance does not cure the issue because the title insurer will exclude the PACE lien from coverage
• ✦The borrower must pay off the PACE lien before or at closing for the first mortgage to be agency-eligible

FHA and VA Treatment

FHA and VA impose similar restrictions. HUD allows PACE financing if the PACE obligation is subordinate in lien priority to the FHA-insured first mortgage. Super-priority PACE structures are not acceptable. VA follows essentially the same logic -- the VA-guaranteed first mortgage must be in first lien position. Like agency loans, these files typically require PACE payoff at closing.

How to Identify PACE Liens Early

PACE liens appear in property tax records and on the preliminary title report. Always review the prelim for any assessment line items that appear unusual. Phrases like 'improvement district assessment,' 'special assessment,' or the specific PACE program name are signals. The property tax bill for the subject property also typically shows the PACE installment as a separate line. Catching this before appraisal avoids wasted costs.