A homeowner calls to refinance. Good credit, solid equity, everything looks routine. Then the title report comes back with an assessment on the property tax bill for a solar installation financed years earlier, and the file stops.
This is one of the most common avoidable surprises in California refinancing, and almost nobody sees it coming — because the paperwork at the time often did not look like taking out a loan.
PACE stands for Property Assessed Clean Energy. It is a mechanism for financing energy efficiency and renewable energy improvements — most commonly rooftop solar, but also windows, HVAC, roofing, and water efficiency work — where the cost is repaid through an assessment added to the property's tax bill.
The structure is what makes it different from a home improvement loan. You are not making a payment to a lender; you are paying a line item on your property taxes. The obligation attaches to the property, not to you personally, and it is collected the same way property taxes are collected.
That design was intentional. It is also exactly why it collides with mortgage financing.
Assessments collected on the property tax roll generally take priority over private liens, including a first mortgage. A mortgage lender in first position expects to be first. A PACE assessment that can be collected ahead of them is not a small technicality — it changes their recovery position if the loan ever defaults.
This is why the secondary market treats PACE obligations the way it does.
Fannie Mae's position is direct: "Properties with solar panels and other energy efficient items financed with a PACE loan are not eligible for delivery to Fannie Mae if the PACE loan is not paid in full prior to or at closing."
There is no carve-out for assuming the obligation, no provision for carrying it forward, and no distinction drawn between a purchase and a refinance. If the PACE obligation is outstanding at closing, the loan cannot be delivered.
For a homeowner, that translates to a simple constraint: to complete a conventional refinance, the PACE balance has to be paid off — usually out of the new loan proceeds.
Your refinance may need to be larger than you planned. If you have a PACE balance, the payoff typically has to be rolled into the new loan. That increases your loan amount, which affects your loan-to-value, potentially your pricing, and whether you qualify at all.
Your available equity shrinks. Homeowners planning a cash-out refinance often find that the PACE payoff consumes much of the cash they expected to take. The 80% ceiling or whatever limit applies to your program is measured against the total new loan, PACE payoff included.
Selling has the same issue. A buyer using conventional financing faces the same rule. In a sale, the assessment generally has to be dealt with at closing, which becomes a negotiation between buyer and seller about who absorbs it.
Find out the real number early. Do not rely on the original contract amount or your memory of the monthly line item. Request a current payoff from the PACE administrator, and pull your most recent property tax bill to see the assessment as it is actually being collected. Payoff amounts frequently surprise people.
If you are considering PACE financing for a future project, the tradeoff is worth understanding in advance. California does require a review before you sign: Financial Code Section 22687 obliges a PACE program administrator to determine, before executing an assessment contract, "that the property owner has a reasonable ability to pay the annual payment obligations for the PACE assessment based on the property owner's income, assets, and current debt obligations." That review is not mortgage underwriting, though, and clearing it does not change the fact that the assessment constrains your ability to refinance or sell until it is paid. Comparing it against a HELOC or a cash-out refinance before you sign is a great deal easier than unwinding it afterward.
If you are refinancing, our conventional loan page covers standard program requirements, and the calculators can help you see how a larger loan amount changes the payment. For county limits, see the California loan limits guide.
Local pages: Sacramento, Inland Empire, Los Angeles, Stockton–Modesto, and San Diego.
To find out where a PACE payoff leaves your refinance, browse our loan officer directory or get started.
Not through conventional financing unless the PACE obligation is paid in full prior to or at closing. Fannie Mae states that properties with solar panels and other energy efficient items financed with a PACE loan are not eligible for delivery if the PACE loan is not paid off by then, so the payoff is typically rolled into the new loan.
PACE is repaid through an assessment on your property tax bill rather than as a private loan. Assessments collected on the tax roll can take priority over a first mortgage, which changes the lender's position, and that is why the secondary market requires the obligation to be cleared.
It has to be addressed at closing if the buyer is using conventional financing, because the same eligibility rule applies to their loan. In practice it becomes a negotiation over who pays the balance off.
Request a written payoff statement from the PACE administrator, valid through your expected closing date, and check your most recent property tax bill for the assessment line item. Do not rely on the original contract amount.
Usually yes. The payoff is added to your new loan amount, so it counts against whatever loan-to-value limit applies to your program and reduces the cash available to you.
This article is for general information only and is not legal, tax, or financial advice. State law and investor guidelines change; confirm current requirements with a licensed professional before making decisions. Xpert Home Lending, Inc. is an Equal Housing Lender.