PACE Liens & Mortgages: Lender Refusals & Your Options
Explains why the senior-lien status of PACE financing is problematic for mortgage lenders including FHA/VA loans, and discusses solutions for buyers and sellers.
PACE Liens and Mortgages: Why Some Lenders Refuse Loans — Options for Sellers and Buyers
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult a real estate attorney or mortgage professional before making decisions about a property with a PACE assessment.
Overview
You apply for a mortgage — whether to buy a home or refinance the one you already own — and the lender delivers an answer you did not expect: denied. The reason? A PACE assessment on the property. Understanding why PACE financing causes lenders to refuse loans, and what options exist for sellers and buyers caught in this situation, is essential for anyone navigating the intersection of solar financing and real estate.
Why PACE Is a Problem for Mortgage Lenders
PACE is structured as a property tax assessment, and under state PACE-enabling statutes, it carries first-priority lien status — the same priority as property taxes. That means the PACE assessment sits ahead of the mortgage in the lien hierarchy. For a mortgage lender, this is a fundamental underwriting problem: their security interest — the mortgage — is junior to an obligation they did not underwrite, over which they have no control, and which can result in tax foreclosure that wipes out their lien.
Traditional mortgages assume the lender is in first-lien position. PACE breaks that assumption. And because PACE assessments can persist for 10 to 30 years with no ability-to-repay underwriting in many states — meaning the borrower's capacity to make payments may never have been verified — the risk profile is unacceptable to most institutional lenders.
FHA, VA, and GSE Restrictions
FHA Loans
The Federal Housing Administration requires that any PACE assessment be satisfied — paid off — by the seller at or before closing. There is no mechanism for a buyer to assume a PACE assessment under an FHA-insured mortgage. If the seller cannot or will not pay off the assessment, the FHA loan cannot close, period.
VA Loans
The Department of Veterans Affairs similarly will not guarantee a mortgage on a property encumbered by a PACE assessment. The VA's underwriting guidelines treat PACE as an unacceptable prior lien. Active-duty military and veteran homebuyers using VA financing are effectively locked out of any property with outstanding PACE obligations.
Fannie Mae and Freddie Mac
The Government-Sponsored Enterprises (GSEs) have both addressed PACE. Fannie Mae's selling guide prohibits mortgages on properties subject to PACE assessments unless the assessment is paid in full at or before closing — or, in some limited circumstances, the PACE obligation is structured with a subordinate lien that does not impair the first mortgage. The latter is rare in residential transactions. Freddie Mac takes a substantially similar position. Because Fannie and Freddie purchase the majority of conventional conforming loans in the United States, their restrictions are market-wide in effect.
Impact on Refinancing
Borrowers who want to refinance a home they already own face the same restrictions. A PACE assessment discovered during a refinance title search will stop the process. The homeowner's options: pay off the PACE assessment from cash reserves (often $25,000 to $50,000), or cancel the refinance. There is no refinancing "around" a first-priority PACE lien.
Options for Sellers and Buyers
Seller Payoff
The most common resolution: the seller pays off the PACE assessment from sale proceeds at closing. This is clean, final, and satisfies all lender requirements. But it requires the seller to have sufficient equity to absorb the payoff.
Negotiation and Concessions
If the seller lacks sufficient equity, negotiation may be the only path. Potential approaches include price adjustments to reflect the buyer's assumption of the PACE burden (if the buyer is paying cash or using a portfolio lender willing to accommodate PACE), or a negotiated discount from the PACE administrator — though this is difficult to obtain without legal pressure.
Subordinate Lien Structures
In limited circumstances, PACE programs may offer a subordinate-lien option — where the assessment is recorded behind, not ahead of, the mortgage. This is sometimes available for new originations but rarely for existing assessments. California legislation has explored requiring subordinate PACE lien structures for residential transactions, though adoption has been uneven.
California PACE Attorney Pathways
In California, where residential PACE has been most heavily litigated, attorneys have pursued multiple theories to challenge PACE liens: failure to provide TILA disclosures, fraudulent inducement by the contractor (whose conduct may be imputed to the PACE administrator under agency theories), and violations of the California Homeowner Bill of Rights. The California DFPI has also revoked PACE administrator licenses for systemic misconduct, potentially affecting the enforceability of assessments administered by those entities.
FAQ
Can I get an FHA loan on a home with PACE?
No — unless the seller pays off the PACE assessment at or before closing. FHA guidelines are explicit: PACE must be satisfied, not assumed.
What if I already own the home and want to refinance?
The PACE assessment must be paid off before or at closing. If you cannot afford the payoff, the refinance cannot proceed. Some portfolio lenders may accommodate PACE, but they are rare and typically charge higher rates.
Is there any way to subordinate a PACE lien?
Subordination is theoretically possible if the PACE administrator agrees, but it is rare in practice — especially for existing assessments. PACE administrators resist subordination because it undermines the senior-lien structure that makes PACE attractive to their financing partners.
What legal claims can help challenge a PACE lien?
TILA violations (failure to disclose APR, finance charges, or provide rescission notices), fraudulent inducement by the contractor, and improper lien recording are the most common claims. Each is fact-intensive and requires evaluation by an experienced consumer protection or real estate attorney.
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