HERO (Home Energy Retrofit Opportunity) is a program that is part of the statewide PACE (Property Assessed Clean Energy) effort. PACE was established in California in 2001 and was used as a blueprint for at least 30 other states. PACE allows property owners to install energy efficient improvements in an existing home with little to no upfront costs associated with the funds provided. The only stipulation is that the improvements must be listed on the approved list before funds can be provided to pay for the materials and labor required to complete the improvement.
The HERO program is great because it does effectively achieve its goal to provide energy efficient upgrades with little to no upfront costs, and it can also increase the value of your home for refinance or sale purposes. However, it is important to be aware of the potential risks associated with participating in this program.
First, it is important to understand that when you speak to a mortgage loan officer, that person has fulfilled certain requirements to become licensed by the state to properly perform the functions required including educating the borrower and making them aware of any, and all disclosures associated with whatever program the borrower is using. This is not the case when working with a representative of a HERO program. Even though the funds for the HERO program are a loan, and must be paid back, the person taking the HERO application is most likely not a licensed loan officer and therefore is not well versed in educating you on the potential risks involved.
To avoid future issues, it is a good idea to speak with a licensed loan officer before obtaining a HERO loan, but here is some basic information in case you are already dealing with a HERO lien.
• There cannot be more than one late mortgage payment over 30 days past due listed on your credit report in the last 12 months
• Property taxes must be current, and no more than one late payment in the past 36 months is allowed
• Other liens (tax liens, child or alimony support payment liens, and/or mechanics liens must be paid off and recorded as paid in full or removed
• No upfront fees
• 20 – year term
• Interest rate can be as high as 11%
• After approval, the applicant chooses from a list of approved HERO products and contractors
• The HERO loan is paid back through an assessment on the property tax bill (warning: if homeowners impound for taxes then they should contact the servicer on their mortgage and let them know that there will be additional funds needed to pay for the HERO program once taxes become due to save yourself from having to pay a larger lump sum out of pocket.)
• The HERO lien is recorded as a superior lien.
The fact that a HERO lien is a superior lien, is the single factor that causes issues when you try to sell or refinance your home, but to understand why we need to go over lien types.
All liens are recorded in the county records office by a person, or entity to show that they have a legally financial interest in your property. Typically, liens are ranked by level of importance based on the date that they were filed, and this is why most banks do not want to loan money on a property unless they will be in first position. First position means that if the home were sold, refinanced, or foreclosed on, that loan (lien) would be paid first before any others.
For example, you obtained a $250,000 loan or mortgage (this is a first lien) to purchase your $300,000 home five years ago. You know that the value of your home has increased to $400,000, and in the past year, you have faced some unexpected financial obligations. You have decided to borrow against the increased value of your home by taking out a second mortgage of $50,000 to consolidate your debt and catch up on your bills. This second mortgage is a secondary, or junior lien because chronologically, it came after your first mortgage. When the home is sold, the first lien will be paid in full before the second lien is paid at all. However, if a second lienholder sees that they will not get paid from the sale or refinance of your home, they can disallow you from selling until your property value increases or demand that you pay them out of pocket before the transaction is complete.
The last type of lien trumps the rule of chronological importance, and it is called a superior lien. A superior lien takes precedence over any other lien (including a first mortgage) regardless of when it was recorded, and this means that it must be paid off prior to anything else.
The example above states that the first mortgage would be paid off in full before the second sees a dime, but if that second mortgage had been a superior lien, then the superior lien would be paid off before the first mortgage saw a dime, and this is why it is difficult to get any type of loan if you have a superior loan attached to your home.
Superior liens include federal and state income tax liens, unpaid property taxes, homeowner association or condo dues, mechanics lien (contracted work on a home that is unpaid), alimony and/or child support delinquencies. As previously stated in the HERO Facts section, a HERO loan is assessed on the property tax bill which makes it a superior lien. Because of this, lenders do not want to refinance your home until you have paid your HERO lien because they do not want to be in second position. It also makes it difficult to sell your home because your buyers lender will not want to give them a loan for a house with a superior lien attached to it due to the fact that they would be taking second position.
HERO Lien Solutions
The first solution is a subordination agreement. A subordination agreement is something that controls the priority of the liens, and it is not uncommon for a superior lien or lien in first position to subordinate to a new lien as long as there is enough value in the property to cover both.
Additionally, there are available VA, and FHA products available that will finance up to 125% of the value of the property which will make it easier to sell and/or refinance your home. For example, if your home is valued at $300,000 and there is an existing mortgage of $275,000 with a HERO lien of $40,000 then you owe a total of $315,000. With the loan products mentioned above, you can get financing of up to $375,000 which is $60,000 more than what you would even need cover the costs for both the mortgage and the HERO lien. Using this option would clear the title of your home, and allow you to sell to new buyers without any issues aside from having to cover the $15,000 that the purchase price would not account for.
Most lenders are not aware of the fact that there are products available for HERO liens, so when a buyer finds a property with a HERO lien, their lender typically tells them they can’t get financing and the buyer finds a different house. We now know this is not true! There are options available, and the right lender can help you, so please contact us to see if you qualify!
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