How the FHA’s Energy Improvement Loans Can Help You Afford Solar

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Intro

If you’ve done some research on solar, the cost of equipment alone may have you thinking that renewable energy is too rich for your blood. You’re not alone. The average American has less than $1,000 saved up, meaning that a hefty $25,000 system price tag is a lot more than most homeowners can afford to pay up front.

But where there’s a will, there’s a way. For homeowners without thousands in the bank, loans offer a path to solar power—without a massive down payment. In fact, the US Federal Housing Administration even provides its own loan program for homeowners looking to make home energy improvements—and that includes purchasing and installing solar energy equipment, as well.

The FHA’s Powersaver loans allow homeowners to take out up to $7,500 in unsecured loans, or borrow against their mortgage for larger projects ranging up to $25,000. A third option gives applicants the chance to refinance their mortgage or get a home loan for a new property, and use the money to purchase efficient properties or make major improvements.

Solar Panel on a Old Roof

PowerSaver Loans: Three Different Paths to Solar

PowerSaver loans actually break down into three different programs—PowerSaver Home Energy Upgrades, PowerSaver Second Mortgages, and PowerSaver Energy Rehab Mortgages. Home Energy Upgrades mainly exist for smaller projects. With a $7,500 maximum cap on lending, they’re great for new insulation or ENERGY-STAR rated windows—things that make a big difference on a home’s overall energy use, but don’t cost a whole lot. Most solar energy systems cost a bit more than $7,500, but these kinds of inexpensive improvements do make solar more effective.

The Energy Upgrades program is also an unsecured loan, which means you don’t have to use your home as collateral. Your credit score and debt-to-income ratio alone determine your eligibility. That means that if for some reason you can’t afford to make payments, you won’t risk losing your home.

The PowerSaver Second Mortgage has a maximum loan amount that’s much larger—up to $25,000—but it means you’ll have to take out a second mortgage. The interest rates aren’t bad, though, and typically range from 4.99 to 7.75 percent. Also, you can get pretty great length loan terms, up to 20 years. Of course, you won’t be eligible for this loan if you’ve already taken out a second mortgage or another home equity loan.

Energy Rehab Mortgages, as you might have guessed from the name, are for massive property overhauls—plus the cost of financing or purchasing a new home. Depending on property values in your area, you could receive as much as $217,500 to $625,000 from this loan, but you’ll have to use at least $3,500 of it toward eligible improvements. Still, this amount will obviously cover the cost of solar and then some.

All three programs require a credit score of at least 660, and a maximum debt-to-income ratio of 45 percent. You’ll also need to have the property looked at by an FHA-approved inspector as a part of your application process.

PowerSaver Loans Can Help You Pair Renewable Energy with Efficiency Improvements

Heating and cooling and insulation can have such a huge impact on energy bills that it doesn’t make a ton of sense to power a home with solar energy if you’re not investing in other improvements as well. Powering an inefficient home is kind of like having a leak in your car’s gas tank—your fuel won’t go very far until you shore up gaps, leaks, and inefficiencies.

But sometimes those improvements can be expensive—especially if you’re already purchasing solar energy equipment and paying for the installation and fees. It’s hard at that point to consider tacking on another $4,000 to $5,000 to purchase a high efficiency HVAC unit. Still, the long-term savings for efficiency projects can be very lucrative, especially when combined with the free energy produced by renewable systems. Cutting back on inefficiencies is one way to earn back your return on investment for renewable equipment more quickly. After all, the less energy required to power your home, the shorter your payback time.

The FHA’s loans aren’t necessarily limited to renewable energy projects alone. That means you could potentially use them to fund a number of different efficiency improvements around your home, including insulation, air sealing, new windows, heating and cooling equipment, or even home energy audits.

installing solar panels

PowerSaver Versus Residential PACE

PowerSaver loans are very similar to Residential Property Assessed Clean Energy Financing (otherwise known as PACE), with one major exception: PowerSaver loans are not transferrable when you sell your property. So while you might get longer loan terms for PowerSaver (20 years max, versus 15 for residential PACE financing), you may find yourself stuck paying off a loan you don’t use if you have to move homes.

On the other hand, unlike PACE, the Home Energy Upgrades program offers an unsecured loan, meaning you don’t have to offer your home as collateral when you apply. For a PowerSaver loan, your credit rate will also have to meet a minimum passing score in order to qualify—at least 660.

Obviously, taking out any loan means weighing the pros and cons carefully. But if you’re feeling dejected by the price of solar, PowerSaver loans do open up a new channel to afford your equipment and adjacent improvements—no matter how much you have in the bank.