Solar power is heating up the energy industry. Last year, a new solar system was installed in the U.S. every two and a half minutes, according to data from GTM Research. The U.S. solar industry is expected to complete its millionth solar installation in 2015.
Because installing a residential rooftop solar system is expensive, most homeowners choose to lease one for a period of 20 years, paying no money out of pocket. But this approach creates a lot of headaches for homeowners and mortgage lenders alike. Because of the benefits that rooftop solar systems offers, it would be wise for the mortgage industry to create a new solar mortgage product.
Rooftop solar systems typically cost between $20,000 and $25,000. This cost translates to a monthly lease payment ranging from $140 to $200. Most solar providers include a built-in annual increase of 2%-3% over the term of the lease.
Leasing a solar system can create many unintentional problems. Most solar companies require lessees to have minimum credit scores of 660, which makes it difficult for homeowners who sell their homes to transfer the lease to buyers with lower credit scores. Keep in mind that the Federal Housing Administration guarantees loans to borrowers with minimum credit scores of 580, while the Department of Veterans Affairs has no minimum credit score requirement.
Moreover, a leased solar system does not add one penny of value to the home. It may even cause a decrease in a home's value because of the additional long-term liability of the solar lease.
A solar lease also creates new debt, thereby inflating a potential buyer's debt-to-income ratio. This makes it more difficult for potential buyers to qualify for both a new purchase loan and the transfer of the lease.
By contrast, purchasing a solar system often increases a home's value dollar-for-dollar. And should the homeowner who buys a system decide to sell, he or she needn't worry about whether the buyer will qualify for the transfer the lease. The long-term savings afforded to homeowners by nearly eliminating electric bills are also significant.
That's why banks should give homeowners the opportunity to finance the purchase of a rooftop solar system into a new mortgage. While the FHA offers a 203(k) home renovation loan, homeowners currently lack conventional mortgage products they can use to purchase and finance a solar system for a home with a loan-to-value ratio above 80%.
Offering a solar mortgage product for homes with higher loan-to-value ratios would allow the mortgage industry to participate in the solar boom. It could easily add billions of dollars to new mortgage originations annually within the next few years.
As solar mortgage products became more widely adopted, financial institutions would save time and money on loan underwriting and processing. Right now, homes with solar leases add significant delays and costs to the mortgage purchasing and refinancing process.
The benefits would extend to the U.S. economy as a whole. Homeowners would pump the monthly savings from their electric bills into consumer spending or bank deposits.
By creating a product that allows homeowners to finance the purchase of a residential rooftop solar system into a new mortgage, the mortgage industry can help the U.S. realize the full potential of solar power, both economically and environmentally.
Nick Bergiadis is chief executive of Champions Lending (formerly Listoda), an online mortgage origination firm.