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Homeowners often face a confusing array of residential solar panel financing options.

Loans work best for people who want to maximize their return on investment by purchasing the equipment. Buying entitles the owner to capture the full benefit of incentive programs.

Renting the systems from a third-party owner keeps the upfront costs to a minimum but has a lower return on investment over time. Leases work slightly differently than power purchase agreements.

Gird yourself with knowledge about the pros and cons of each alternative to avoid going green with envy or regrets. Follow the outline to explore each option in detail before completing an application and moving away from the electric grid.

Solar Panel Loans for Ownership

Solar panel loans are a financing option that can provide the money needed to fund the installation and ownership of a new residential system. Buying the system is often better than renting if you want to take advantage of all possible incentives and rebate programs.

  • Federal IRS Investment Tax Credit (ITC)
  • Solar Renewable Energy Credits (SREC)
  • Performance-Based Incentives (PBIs)
  • Net Metering
  • Sales and Property Tax Exemptions

Owning a system also works best for people with high electricity bills from running air conditioners, appliances, hot tubs, swimming pool heaters, televisions, computers, and a host of other in-home gadgets with power cords.

Consumers have many types and sources to choose from to help fund a project.

Unsecured Loans

Taking out an unsecured loan to fund a solar panel purchase does not require the person to pledge collateral. The lender relies on your signature promise to pay backed only by your borrowing qualifications when making an underwriting decision.

It’s easy to get a personal loan. (Affiliate Link) Without collateral backing an unsecured loan, the lender has less attractive options to recoup losses in the event of default. They cannot foreclose on your home, or repossess your system. Filing a lawsuit to garnish wages or place a lien against the property is their only alternative.

The higher risk exposure to unsecured lenders translates into several considerations for borrowers.

The two factors combine to make unsecured loans a better option to support any down payment requirements associated with secured contracts (see below).

Secured Loans

Secured loans are the most popular option for funding residential solar panel purchase and installation. The word secured means that you pledge an asset as collateral. The collateral usually includes your home or the renewable energy system itself.

Pros

Using a secured loan to fund the installation and ownership of solar systems has four main advantages.

  1. Qualifying is easier because the lender holds the title to your collateral
  2. Interest rates are often better to reflect the lower default risk
  3. Mortgage interest may be tax-deductible
  4. Repayment terms are longer which translates into smaller monthly payments

Cons

The risk of losing your collateral is the biggest drawback to using a secured loan. A bout with a severe medical condition causing disability, or a period of unemployment can quickly lead to default. The lender may send you a notice of right to cure if you fall behind on payments.

A property lien, foreclosure, or repossession often follows the cure notice if you are unable to bring your account current. A default could mean you lose your house, or the contractor removing the panels from your roof, and the batteries and inverter from your garage or basement.

Types

The two forms of collateral for secured loans result in very different experiences for the solar system customer during the qualification, purchase, and repayment phases of the process. Choose the collateral option wisely.

House as Collateral

Homeowners can choose to use their houses as collateral when borrowing money to fund a renewable energy system. Each alternative requires that the applicant have sufficient equity (value of the property minus the outstanding mortgage balance), and places the residence at risk in the event of default.

The lender deposits funds into the customer banking account, giving the person the flexibility to shop around for the best deal and service. You have three options within this category.

  1. Cash-out refinancing of a primary mortgage
  2. Home equity loan subordinate to the primary mortgage
  3. Home equity line of credit which works as a revolving account

System as Collateral

Homeowners can also choose to use the solar power system (panels, batteries, inverter, wiring, etc.) as collateral when borrowing money. Expect to fund a down payment to qualify in many cases. In the event of default, you keep your house, but the contractor may arrive with ladders and trucks to repossess their equipment.

In this case, the lender provides the funding to the participating contractor rather than the homeowner. Money sent directly to the contractor means that you must shop around before applying for the financing, and limit your choices to participating suppliers.

On the other hand, these third-party equipment-financing companies often offer incentives such as zero-interest promotional periods and or no down payment to qualified applicants. The most prominent companies in this space are Dividend, Mosaic, and Greensky.

Government Loans

The federal government does not issue loans for homeowners to buy solar panels for their residence. However, several government agencies manage programs that make it easier for marginal applicants to borrow money when they otherwise might not qualify (lower credit scores and or insufficient home equity).

FHA Title 1

Homeowners can look into FHA Title 1 loans to finance a solar system purchase. The Federal Housing Authority (FHA) is a government agency that insures private lenders against losses on property improvement financing they approve. The government-sponsored (and borrower funded at $1 per $100 borrowed annually) insurance makes it easier for private lenders to approve marginal applicants.

The homeowner must use the FHA Title 1 funding to improve the basic livability or utility of the property. This definition could include the installation of residential solar equipment. You have two options with different provisions for single-family dwelling units.[1]

Type Max Amount Repayment Term
Unsecured $7,500 6 Month Min
Secured $25,000 20 Years Max

FHA Energy Efficient Mortgage

The FHM Energy Efficient Mortgage (EEM) is another government program that promotes the adoption of solar technologies. Under an EEM, the borrower must qualify for the purchase or refinance of the property – excluding the cost of the energy-efficient upgrades.

The projected money saved on utility bills should offset the higher monthly payments for the upgrades. A qualified home energy assessor must determine that the investment is cost-effective. In other words, the cost of installing the panels is equal to or less than the money saved on electricity over their expected life span.[2]

Residential PACE

Residential Property Assessed Clean Energy Programs (PACE) allows homeowners to finance renewable energy home improvements using private sources of capital. Under a PACE program, the city, or municipal government lends the money, and the consumer pays the funding back through a higher property tax assessment.

However, the PACE option is available in only three states at the time of publication (10/2019). The regions are California, Florida, and Missouri.[3]

Fannie Mae

Federal National Mortgage Association (Fannie Mae) is a government-sponsored enterprise, which securitizes loans to enable private lenders to reinvest assets into more lending. The Fannie Mae HomeStyle Energy Mortgage allows consumers to finance home upgrades that reduce utility costs such as solar system installations.

The Fannie Mae program expands eligibility by factoring in savings from tax credits, rebates, and lower projected electricity charges. An energy report waiver is available if you are installing a renewable energy source such as photovoltaic panels, wind power devices, and geothermal systems.

Use the HomeStyle Energy Mortgage to purchase new equipment or pay off high-interest or short-term energy-related debt.

Massachusetts

The Massachusetts solar loan program is an example of a state government-backed effort. The initiative connects homeowners interested in clean energy technologies to certified installers and lenders. The program also makes it easier for low-income residents to qualify and afford the systems.[4]

  • Interest rate buy-down lowers monthly payments
  • Loss reserves help lenders approve marginal applicants
  • Income-based support reduces the monthly payment by 30%

Solar Panel Rental Programs

Residential solar panel rentals are a financing option where a third party company retains ownership of the equipment and the lessor benefits from a portion of the electricity savings. Renting can be better than buying because of the lower upfront costs – although the return on investment is less over time.

System rentals can take the form of leases or power purchase agreements.

Leasing Systems

Solar leases are a rental arrangement where the homeowner benefits from the lower electricity costs while the contractor retains ownership of the system. The contracts typically feature smaller upfront costs (zero money down and lower monthly payments).

Leasing programs typically have a much lower return on your investment because the third party owner benefits from the incentives and rebates. Also, you commit yourself to make payments for 20 to 25 years. People who move and need to sell their homes before the contract expiration can complicate the real estate transaction.

Leases often appeal to people who cannot qualify to finance ownership.

Power Purchase Agreements

A Solar Power Purchase Agreement (PPA) is a rental arrangement where a contractor handles the design, permitting, installation, and maintenance of a system with little or no cost to the homeowner. The contractor then sells the electricity to the consumer at a fixed rate that is far below what the local utility company charges.

A PPA package deal appeals to people who want to support sustainable energy programs but lack the resources to buy or lease a system. They benefit from lower electricity costs without making a significant financial commitment.[5]

Sources:

[1] FHA Title 1

[2] FHA Energy Efficient

[3] US Department of Energy

[4] Massachusetts Department of Energy

[5] Purchase Power Agreements