Mortgage giant Fannie Mae just unlocked the lowest cost of capital for new solar installations to date. This follows HUD’s recent decision to finance new solar installations within a first mortgage transaction, a potential game changer for the solar industry with the ability to bring about the next order of magnitude in solar installations.
Fannie Mae’s HomeStyle Energy Mortgage offers the lowest cost of capital for solar (currently mid-3 percent range fixed). To date, this market is the largest untapped source of low-cost capital that the solar industry can leverage for the benefit of homebuyers and mortgage refinancers. A new source of low-cost capital is increasingly important in order to accelerate solar industry growth, as some solar leasing companies have seen their own cost of capital rise in recent months or had access to capital shut off completely. This could be the game changer the solar industry has been looking for, from the value proposition of solar ownership all the way to how solar is marketed and sold to current and future homeowners.
What is the HomeStyle Energy Mortgage?
The HomeStyle Energy Mortgage from Fannie Mae enables a homebuyer or mortgage refinancer to add a solar system after the mortgage loan has closed by allowing up to 15 percent of the “as completed” home value to be used to pay for the cost of a solar system with funds escrowed by the lender, and gives the homeowner 180 days after the closing date to have the solar system installed. The new mortgage requires a home energy report to determine the cost-effectiveness of the solar improvement. The report must show the present value of energy savings is greater than the cost to install. The homeowner must also have an “as completed” appraisal, which includes value for the not yet completed solar system.
The initial concept, including the benefits of financing new solar installations within a purchase or refinance mortgage, was first proposed in 2012 to industry stakeholders, including Rocky Mountain Institute. It was then presented in 2013 at the Photovoltaic Specialists Conference in Tampa, FL.
Methods for developing value for solar using the appraisal industry’s income and cost approaches were proposed in 2010, and later published in the fall 2013 edition of the Appraisal Journal (a publication of the Appraisal Institute), and have been allowed by both Fannie Mae and HUD since 2015. Appraisers, realtors, homeowners and lenders can now estimate the market value of solar by using the free online PV Value® tool recently developed by Energy Sense Finance with funding from the U.S. Department of Energy’s SunShot initiative.
Why This is a Game Changer
Adding solar when purchasing a home or refinancing a mortgage has the potential to become the default choice, like repainting a room, new landscaping, or any other minor improvement a homeowner makes when completing a new real estate transaction. Fannie Mae’s financing for solar can result in:
- More captured value: As homeowners continue their shift away from leasing solar to owning solar, this new financing will allow homeowners to both capture more of the monthly savings instead of paying it out to a third party, and capture the value of solar within their home appraised value.
- Lower installation costs: This new financing method for solar will help drive down installation costs by allowing homebuyers and homeowners to consider small local solar installation companies for a quote. Many smaller solar installation companies are currently unable to offer competitive low interest-rate financing arrangements, yet are properly licensed, trained, and able to offer very competitive installation costs without financing.
- Solar as a commodity: This will encourage healthy competition between installation companies and turn solar into a commodity, taking financing out of the equation, since homebuyers and mortgage refinancers can now have the cost of the solar installation included within their mortgage at their low, already-agreed-upon interest rate. It’s like walking into a car dealership with a check already in hand from the local credit union, not needing any dealer-provided financing, and knowing what the value of the car is before purchasing it.
- Increased viability: As installation costs align with local marketplaces, solar will become competitive with traditional energy sources in more states, including those with lower utility rates, increasing the adoption rate in the process.
The Technical and Market Potential
The conforming mortgage industry currently averages just over 4 million purchase and refinance transactions per year. Meanwhile, the National Renewable Energy Laboratory estimates that up to 89 percent of available small rooftops measuring less than 5,000 square feet are good candidates for solar and can support a minimum system size of 1.5 kW.
If Freddie Mac follows Fannie Mae and HUD with a similar offering of its own, it could open up financing for new solar installations on 3.5 million residential mortgage transactions a year, allowing for the solar system to be installed after the mortgage transaction closes.
While several factors will have an impact on the actual market potential—age of roof, local utility rates, net-energy metering policy, installation costs, available solar resource, etc.—as utility costs continue to increase and the cost to install solar continues to decrease in many states, we estimate between 1 and 1.75 million homeowners will take advantage of the ability to finance solar installations at the lowest interest rate available.
Just 1 million installs per year of homeowner-owned solar at a value of $10,000 per system has the potential to add $10 billion annually to residential property values nationwide. This new annual market potential comes as the solar industry recently celebrated its 1 millionth install, taking nearly 40 years to achieve this milestone.
Example: Home Purchase with New Solar Installation
Example: Home Limited Cash-out Refinance with New Solar Installation
In this example, the homeowner obtaining a limited cash-out refinance would be able to cover the entire cost of the installation and finance it in his or her low interest rate refinance mortgage.
What About Lower Income, Low Down Payment Borrowers?
For those who can’t meet the typical Fannie Mae requirements for a higher down payment, income, or credit score, there is a similar product from the U.S. Department of Housing and Urban Development, referred to as the “solar and wind and technology policy.”
It can be used with both purchase and refinance transactions, and allows for up to 20 percent of the “as-is” home value prior to the solar installation to be used to cover the cost of a solar installation. Additionally, it gives the borrower up to 120 days to have the solar system installed after the mortgage closing date.
What About New Home Construction With Solar?
For new home construction, the U.S. Department of Energy's SunShot initiative funded a working group led by Sandia National Laboratories that put together Solar Basics for Homebuilders, which laid out the financing options available for both homebuilders and new homebuyers who want to include a solar system with the new home.
Additionally, the Appraisal Institute, working in conjunction with the National Association of Homebuilders and the Building Codes Assistance Project, put together information for homebuilders to ensure that the new homebuyer receives an appraisal from a competent appraiser who has received specific training in valuing homes with solar.
There are now multiple sources of low-interest rate financing mechanisms in place for new solar installations that allow virtually all current or future home owners to own their solar, maximize their monthly savings, and ensure the solar PV Value is included in their home appraised value.
Where Do We Go From Here?
Marketing to homeowners and homebuyers is key to ensuring they become aware of the new low interest rate financing options for solar. Additionally, appraisers need to be trained in how to properly develop value for solar systems and demonstrate competency before accepting an appraisal assignment where the home includes a solar PV system. To assist with this effort, the Appraisal Institute offers a two-day course titled “Residential and Commercial Valuation of Solar,” developed with funding from the U.S. Department of Energy's SunShot initiative. There are additional educational efforts underway that will be announced later this year.
Solar installers may seek to work with real estate agents, home sellers, and homebuyers to educate them about this financing and offer a solar installation quote with each new listing, along with an estimate of the income approach value using the PV Value® tool. Additionally, they may want to obtain a home energy rater designation and become a HERS or HES rater if current guidelines remain in effect.
Energy Sense Finance plans on undertaking education efforts relating to valuation of solar with the PV Value® tool, providing a national database of solar installations to appraisers, and addressing the valuation of energy storage with solar in the new Ei Value™ platform that will be available later this year.
Providing a low cost of capital source and enabling market value for solar were two missing pieces needed to enable a more rapid uptake in the solar adoption rate, and now that those are coming into place, the solar industry can look forward to many sunny days ahead.