Properties with PACE Obligation

The lender (Mortgagee) has specific responsibilities when a PACE obligation is present. They must notify the appraiser if they determine the property is subject to a PACE obligation so the appraiser can properly analyze its impact. Additionally, the lender must verify that the PACE obligation is paid off in full prior to or at closing. For purchase transactions, they must ensure the sales contract contains the required clause regarding the seller’s responsibility to satisfy the debt. The lender ultimately ensures the property meets all title and lien requirements before endorsement.

No, properties that will remain encumbered with a PACE obligation are not eligible for Title I Property Improvement Loans. The Title I program, which insures loans for light or moderate rehabilitation of properties, follows similar restrictions regarding lien priority and encumbrances. Just as with Title II Single Family mortgages, the existence of a PACE obligation that continues after the loan closes creates an unacceptable risk regarding lien priority. Therefore, the obligation must be resolved for the property to qualify for Title I loan insurance.

You can refinance a property with an existing PACE obligation using an FHA loan, but only if the obligation is paid off as part of the transaction. A property that will remain encumbered by a PACE obligation after closing is not eligible for FHA insurance. In a refinance scenario, the payoff of the PACE obligation is necessary to ensure the FHA-insured mortgage holds the proper first lien position. The borrower must provide evidence that the obligation has been satisfied or will be satisfied at closing to proceed with the FHA refinance transaction.

No, the satisfaction of a PACE lien or obligation by the property owner (seller) is an exception to the Interested Party Contribution (IPC) rules. Generally, FHA limits IPCs toward a borrower’s closing costs to 6 percent of the sales price. However, a seller can pay off the full balance of a PACE obligation to clear the title without that payment counting against the 6 percent limit. This distinction allows sellers to clear the encumbrance without reducing the amount they can otherwise contribute to the buyer’s closing costs and prepaid items.

The appraiser plays a vital role in identifying and reporting PACE obligations. If the lender notifies the appraiser of a PACE obligation, or if the appraiser observes evidence of it—such as higher-than-average tax bills or specific energy-related components—they must analyze it. The appraiser is required to review the sales contract and property tax records to determine the outstanding amount of the obligation. Furthermore, the appraiser must analyze and report the impact of the PACE-related improvements on the property’s value, assuming the assessment will be extinguished as required by FHA policy.

Yes, for Home Equity Conversion Mortgages (HECM), borrowers are permitted to use the proceeds from the HECM loan to pay off a PACE obligation in full at the time of closing. While properties encumbered with a PACE obligation are generally ineligible, satisfying the debt at closing resolves this issue. This allows the borrower to access their home equity while simultaneously clearing the PACE lien, thereby meeting FHA requirements. Whether for a traditional HECM or a HECM for Purchase, the obligation must be extinguished to ensure the property serves as adequate collateral for the loan.

Yes, specific documentation is required within the sales contract. If the subject property is encumbered by a PACE obligation, the sales contract must include a clause explicitly stating that the obligation will be satisfied by the seller at, or prior to, the closing. This clause protects the borrower and the lender by ensuring all parties agree that the debt will not transfer to the new owner. It confirms that the assessment will be extinguished, allowing the FHA loan to proceed without the complication of a superior lien related to the energy improvements.

For FHA purchase transactions, the seller is responsible for satisfying the PACE obligation. The sales contract must clearly reflect that the obligation will be satisfied by the seller at or before closing. The buyer is not permitted to assume the PACE obligation, nor can it remain on the property after the transfer of title. This requirement ensures that the borrower obtains a property with clear title and that the FHA-insured mortgage serves as the first lien. The satisfaction of this obligation is a mandatory condition for loan approval in purchase scenarios involving PACE liens.

Property Assessed Clean Energy (PACE) is an alternative financing structure for energy-efficient, renewable energy, or other allowed improvements on residential properties. These programs are typically provided by private enterprises in coordination with state and local governments. Unlike a standard consumer loan repaid monthly to a bank, a PACE obligation is repaid through the local government, appearing as a special assessment on the property tax bill. Because these obligations are secured against the property like tax assessments, they often hold a super-priority lien status, which conflicts with FHA requirements for a valid first lien.

Generally, properties that remain encumbered with a Property Assessed Clean Energy (PACE) obligation are not eligible for FHA mortgage insurance. The FHA requires that the property be free of such restrictions upon endorsement to protect its lien position. Therefore, for a property to be eligible for FHA financing, the PACE obligation must be paid off in full prior to or at the time of closing. This requirement applies to both purchase and refinance transactions, ensuring the FHA-insured mortgage holds a valid first lien position without being subordinate to a PACE tax assessment.