July 21, 2016
Recently we wrote a blog post about FHA plans to allow qualifying homes with PACE assessments to be purchased with FHA mortgages. The FHA announced this recently in order to help promote energy efficiency (PACE stands for Property Assessed Clean Energy and may be assessed in a manner similar to property taxes.)
The FHA issued a mortgagee letter explaining how and why a property with a PACE assessment may be eligible for an FHA mortgage. Past issues with PACE include being considered a “first lien” on the property. FHA loan rules explain how new guidelines can permit a home with PACE to be purchased with an FHA mortgage:
“Properties which will remain encumbered with a PACE obligation may be eligible for FHA-insured mortgage financing, provided that the mortgagee determines that the following requirements have been met:
–under the laws of the state where the property is located, the PACE obligation is collected and secured by the creditor in the same manner as a special assessment against the property;
–the property may only become subject to an enforceable claim (i.e., a lien) that is superior to the FHA-insured mortgage for delinquent regularly scheduled PACE special assessment payments. The property shall not be subject to an enforceable claim (i.e., lien) superior to the FHA-insured mortgage for the full outstanding PACE obligation at any time (i.e., through acceleration of the full obligation.) However, a notice of lien for the full PACE obligation may be recorded in the land records;
–there are no terms or conditions that limit the transfer of the property to a new homeowner. Legal restrictions on conveyance arising from a PACE obligation that could require the consent of a third party before the owner can convey the real property are prohibited, unless such provisions may be terminated at the option of, and with no cost to, the home owner;
–the existence of a PACE obligation on a property is readily apparent to mortgagees, appraisers, borrowers and other parties to an FHA-insured mortgage transaction in the public records and must show the obligation amount, the expiration date and cause of the expiration of the assessment, and in no case may default accelerate the expiration date;
–and in the event of the sale, including a foreclosure sale, of the property with outstanding PACE financing, the obligation will continue with the property causing the new homeowner to be responsible for the payments on the outstanding PACE amount.
Furthermore, the FHA spells out a requirement for appraisals on PACE properties. “Where energy and other PACE-allowed improvements have been made to the property through a PACE program, and the PACE obligation will remain outstanding, the appraiser must analyze and report the impact on the value of the property, whether positive or negative, of the PACE-related improvements and any additional obligation (i.e., the PACE special assessment).”
FHA loan rules state that the guidelines listed above are not applicable to FHA Home Equity Conversion Mortgages. At the time of this writing, FHA HECM loans are not permitted on homes with PACE assessments.
This information is found in FHA Mortgagee Letter 2016-11, you can read the full text of that mortgagee letter in a downloadable PDF from the FHA official site.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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