Solar Panel Mortgage Underwriting: Leased vs. Owned, PACE Liens, and Fannie Mae Appraisal Requirements

Solar panels create underwriting complexity that most MLOs encounter without preparation. Whether the panels are owned, leased, or financed via a PACE program determines how the transaction is structured, what the appraiser must do, and whether the loan can be sold to Fannie Mae or Freddie Mac. Getting this wrong costs time and sometimes kills deals in escrow.

Owned Solar Panels

If the borrower owns the solar panels outright (purchased with cash or a personal loan not secured by the property), the panels are personal property that has been attached to real property. Fannie Mae requires the appraiser to consider whether the installation has affected value and to comment on the solar equipment in the appraisal. The solar system is typically added to the property value in the appraisal, and the lender does not need to take any additional underwriting steps. The presence of owned panels does not require a lien subordination or any special title work.

Leased Solar Panels

• ✦Leased solar panels mean the seller does not own the panels; the lease is typically a 20-25 year agreement with a solar company
• ✦The buyer must assume the solar lease or the seller must terminate it before closing; the lender cannot be in a first-lien position with an outstanding solar lease that creates a priority lien
• ✦Leased solar systems may or may not appear in the title search; the lender must obtain a copy of the lease and confirm its treatment under applicable state law
• ✦Fannie Mae requires that leased solar systems not be included in the appraised value of the property
• ✦Monthly lease payments are included in the borrower's DTI calculation as a liability

PACE Liens

PACE (Property Assessed Clean Energy) financing is a lien against the property that is paid through property tax assessments. PACE liens are typically in a priority position above the first mortgage, which creates a problem for Fannie Mae and Freddie Mac eligibility. Both GSEs have historically not purchased loans where a PACE lien exists in a superior lien position without subordination. The PACE lien must be subordinated to the first mortgage, or paid off at closing, as a condition of Fannie Mae or Freddie Mac eligibility. Confirm PACE lien status through a preliminary title search before submitting a loan for agency delivery.