IMT recently interviewed experts on financing solutions to help increase the number of residential solar installations in Washington, D.C.
As part of IMT’s work with the District of Columbia’s Department of Energy and Environment (DOEE), we’ve spent the past several weeks researching ways to increase the number of residential solar installations that occur at the time of a home’s sale or during a refinance.
There are several options available in the District for those who are interested in owning a solar photovoltaic (PV) system. For our research, we chose to focus on a promising method of financing that can also be applied to energy efficiency upgrades—wrapping the cost of solar into a mortgage. Although our attention was on the DC market, if this model proves successful, it could potentially be applied nationwide.
Despite some barriers described by the Rocky Mountain Institute (RMI), a time-of-sale or refinance option may be financially appealing to homebuyers and owners and could potentially streamline financial transactions for efficiency and renewable upgrades. IMT spoke with a range of professionals in the District including an appraiser, a mortgage expert, a real estate agent, and a green homebuilder, as well as lenders and solar installers in an effort to explore the possibility of this concept. From these discussions we gained valuable insights for ways to increase solar installations through smart financing. Here are some of them, slightly condensed and edited for clarity:
Installing solar at the time of sale is a good concept, with some caveats.
Several respondents agreed with the initial premise that installing solar at the time of sale makes better economic sense for a homebuyer than securing a second mortgage or a solar loan at higher rates. A local solar installer suggested that DOEE develop a pilot program focused on incorporating solar installations into the home-buying process and expressed a willingness to participate in such a program with a partner bank. The same installer also suggested working with the District’s Department of Housing and Community Development to include solar financing in its Home Purchase Assistance Program, which provides zero-interest loans and closing cost assistance to qualified homebuyers.
However, the idea of closing on a home and solar system simultaneously raises some concerns. One solar professional pointed out that the home-buying process can be convoluted and stressful as is. He suggested offering strong incentives to encourage time-of-sale solar installations. One such incentive might be to waive the first year’s property tax.
In addition, one barrier mentioned in RMI’s report is that lenders are not well equipped to accurately determine the value of a solar PV system, making it hard to underwrite a mortgage to include solar. Educating lenders about value determinative tools is crucial for success.
Refinancing could be a useful alternative to the time-of-sale option.
Refinancing, which offers more flexibility and does not require a change in ownership, might be a better option than time-of-sale in some cases. A mortgage expert echoed concerns about pursuing solar at the time of sale, explaining that refinancing would be a smoother transition for already-settled homebuyers who are likely to have more time to focus on the transaction.
Scaling up installations requires education.
Finally, and perhaps most importantly, we came to recognize the significance of educating prospective homebuyers about the benefits of installing solar. Several interviewees suggested that DOEE create a brochure describing the financial benefits of installing solar at the time of sale, which could be distributed to potential homebuyers. Another respondent also mentioned the obvious need to educate appraisers, real estate agents, and lenders.
For those interested in existing programs, last year IMT published "Designing a Mortgage Process for Energy Efficiency", a paper that explored a mortgage product similar to the concept discussed above. The paper highlights the Federal Housing Administration’s (FHA) Energy Efficient Mortgage (EEM), which integrates home energy efficiency and solar investments into a mortgage. While the FHA EEM appears to be a promising model, insufficient promotion and a few suboptimal design characteristics have prevented this product from catching on in the marketplace.
In addition to its EEM program, FHA offers PowerSaver loans, which allow more homeowners to invest in energy efficiency. One loan covers up to $7,500 of energy-saving improvements, but isn’t connected to a mortgage. The Power Save Second Mortgage loan is for retrofits up to $25,000 and the third and final is the PowerSaver Energy Rehab Loan, which can be used for energy efficiency improvements as part of an FHA 203(k) rehabilitation first mortgage. FHA’s PowerSaver loans have been largely underutilized, as they are often not promoted by lenders. Although demand for PowerSaver loans is low, they are still a competitive option for homebuyers interested in energy efficiency.
In any situation, homebuyers should be informed of the financing options available to them—whether they’re seeking renewable energy, energy efficiency, or some combination of smart solutions to protect them from high energy costs. For more information, visit the Database of State Incentives for Renewables & Efficiency (DSIRE), and stay tuned as we explore more financing options that allow for wider adoption of energy efficiency and solar.