ONE COOL THING.
Each month we’ll send you one cool thing to know about California real estate.
This Month, February 2016, it’s all about the HERO Program. If you’re considering adding energy efficient upgrades to your home you may have considered and/or heard of the HERO program (Home Energy Retrofit Opportunity).
A few of you have asked me about the pros and cons of using this program as it’s easy to find mixed reviews. I decided to investigate specifically as to how the program affects Homeowners when they try to resale or refinance with a HERO loan in place. After speaking with Lenders, Escrow and Title Officers, and generally reading more about HERO, this newsletter highlights the program and the “need to know” before diving in.
HERO launched in 2011 as an entity of the larger PACE initiative (Property Assessed Clean Energy) which started in California in 2001 and now exists in 31 states nationwide. HERO, the dominant PACE program in San Diego, was created to offer homeowners an alternative way to finance energy-efficient upgrades. Upgrades include solar energy, windows, air conditioning units and drought-tolerant landscaping to name a few.
Costs of upgrades are written into property tax bills as an added assessment, paid on a homeowner’s semi-annual tax bill. Payments can stretch from 5-20 years and interest is tax deductible.
Sample Property Tax Bill with HERO Assessment
What to Know
- The HERO assessment is recorded against the property as a tax lien.
- The HERO lien becomes the priority lien, recorded as the first lien above a homeowner’s mortgage. In the case of default, HERO gets paid-off first.
- 90% of mortgages in the U.S. are owned or guaranteed by Fannie Mae and Freddie Mac. Neither Agencies want their first lien position threatened as that priority position is what the mortgage market relies on.
- The Federal Housing Finance Agency went so far as to issue a statement on these “super-lien” programs in December 2014 alerting homeowners, lenders, financial institutions and state officials that they prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it.
What This Means To A Homeowner
- A Homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage.
- A Buyer interested in purchasing a home with a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase.
- These restrictions may reduce the marketability of the house or require the homeowner to pay-off the loan before selling the property. Most Buyers will be purchasing using a loan guaranteed by Fannie Mae or Freddie Mac.
Can You Subordinate a HERO Loan?
- Although Title confirmed it’s possible to subordinate the HERO loan to the second position, a Lender with first-hand experience relayed that Fannie Mae and Freddie Mac are not currently accepting the verbiage in the HERO subordination agreement. Therefore a homeowner, for now, is very likely to need to pay-off the lien in full before a new loan can be used.
Should You Use the HERO Program?
If you know the facts going in, the HERO Program may still very well present more pros than cons. It allows homeowners a new way to finance energy efficient upgrades; upgrades that they may have otherwise not had the opportunity to do.
My advice is to thoughtfully plan for worse scenario. If, unexpectedly, you did need to sell your home while the HERO loan is still in place…would you have the resources to pay-off the loan in full to close the sale? Would you have enough equity to pay-off closing costs, the HERO loan and any existing deeds of trusts (mortgages)?
Answering these questions upfront may help you strategically decide which upgrades are the most economically viable to do. Conversely, if this is your forever home, resale and refinancing may be a lesser priority than the potential everyday savings gained using the program.
All this being said, regulations change daily and it’s possible the Federal Housing Finance Agency and HERO-type programs will find ways to co-exist, making resales and refinancing easier for homeowners in the future.
For additional questions on your own specific needs call or email me. I’m happy to help you get answers.
To read more about PACE and HERO click here for a June 2015 article by the Voice of San Diego.
September 2016 Updates
- The property’s HERO assessment and the assessment details must be mentioned and included in the original purchase contract between Buyer and Seller.
- The details must include the total cost of the HERO assessment.
- The original contract must address whether or not the Buyer agrees to inherit the assessment with the property.
Having the assessment details in the original contract allows the lending institution and the Appraiser (who will evaluate the property’s market value) to be informed upfront. Appraisers must then include the assessment information in their appraisal report but NOT incorporate the assessment into the value of the home. Meaning, if a homeowner has a $20,000 HERO program assessment on their home for the improvements they installed, that $20,000 cannot be added to the Appraiser’s fair market value of the home.
Based on the above, it’s a good idea for Sellers to disclose upfront that they have a HERO assessment and disclose: the total cost of that assessment, the duration of the assessment, the monthly payments of that assessment, and how many years are left to be paid on the assessment. A Seller will want the Buyer to understand fully what they are assuming and agree to that assumption during contract negotiations.
Currently, this HERO resale allowance only applies to FHA and VA financing. Conventional loans continue to require the assessment be paid-off in full.
For Buyers, given that Appraisers currently cannot allocate any value to an outstanding HERO program assessment, it may make better sense to negotiate that the Seller pays-off the assessment in it’s entirety at close of escrow versus assuming the assessment.
Frequently Asked Questions
This will be a better question for your trusted lending institution as lending practices do vary. Not all lending institutions sell their home loans on the secondary market which may make it possible for some companies to be more flexible with refinancing. We would recommend consulting with a variety of different Lenders to find out what they can and cannot do. e.g. Direct Lender, Credit Union, etc.
What we can share is that a Client of ours did try to refinance a current home loan this year (Spring 2016), a straightforward refinance not a cashout- refi, soon after obtaining a HERO loan and were declined specifically due to having the HERO assessment. Again, every homeowner’s financial situation is different but this was an example of the HERO loan disrupting an otherwise commonplace refinance.
2. Is it possible to pay off the Hero loan using the proceeds of the sale? I have a good amount of equity, but don’t want to pay off the Hero loan with my savings prior to closing. Do you know if they can build that into the closing as a stipulation that the HERO loan gets paid off with proceeds after closing?
Yes, our Title Representative confirmed that a Seller can use their equity proceeds to pay-off the HERO assessment at the time of closing. This assumes the Seller has enough equity in their home to cover the costs of sale AND the HERO assessment, otherwise a homeowner may need to bring cash-to-close to cover all costs (assuming it’s negotiated that the Seller pays off the loan for the Buyer).
As a Seller, yes, you will want to disclose the HERO assessment to a Buyer upfront (as mentioned above) and stipulate into the contract how the assessment will be handled e.g. assumed or paid off. If a Seller intends to pay-off the assessment using proceeds at closing, it would make sense to spell this out during the contract negotiations so that all parties are on the same page. (Note the pay-off occurs AT closing not AFTER closing.)
3. I’ve been looking into the HERO program for an A/C unit. I have read a lot about the program but find that most information is old. Can you give me any helpful current info – and is there a better way of going about this?
Our updates above are as of 2016, but specific to the HERO program’s affects on home sales and refinances. We are a local San Diego County real estate firm and not in any way affiliated with the HERO program itself. The HERO website should be a helpful resource for anyone considering the use of the program. The website also allows homeowners to find HERO affiliated contractors.
Like any program, a homeowner should simply understand all of the facts about the program and consider their short and longterm goals. Home improvements can be costly and depending on your situation, the HERO program may be a great resource. As a Real Estate Professional we are just here to help you understand the side effects of such a program as it relates to selling a home given you’re financing the improvements as a tax assessment.
To decide if HERO is the best way of financing home improvement projects a homeowner may want to also look at other types of financing products simultaneously, and then compare each to determine what makes the most sense financially.
Is someone you know thinking about buying or selling?
Have them call me. I’ll help them get started!
Laura Sechrist Molenda