How to Find Home Financing Despite a HERO Loan

We all want to improve our homes and make them more energy efficient.

One of the most convenient ways to do this is through the HERO program, a government loan that is paid back through property taxes. While useful for reducing energy consumption, these loans can create unique challenges for homeowners.

Learn more about the issues with HERO loans and how the Federal Housing Administration or the Department of Veterans Affairs can help solve the problem.

HERO Loans: Why They Create a Problem

What is a HERO Loan?

To fully understand HERO loans, we need to take a step back and explain the Property Assessed Clean Energy program, or PACE. PACE is a system of financing energy-efficient upgrades for different types of property, including residential, commercial, and industrial buildings. Essentially, this program offers a path for building owners to make their facilities more efficient. With the PACE framework, local governments provide initial capital for the installation of energy-efficient projects and renewable-energy systems. The building owner then repays the capital over a 20-year period.

According to a 2014 paper from the Arizona State University Energy Policy Innovation Council, PACE programs are used in 12 states, as well as Washington, D.C., to improve commercial properties.

HERO, which stands for “Home Energy Renovation Opportunity,” is a program that comes from PACE. As the name implies, HERO is specifically designed for residential upgrades, but it has a special twist. Instead of making traditional payments like PACE commercial loans, the HERO loan is repaid through property taxes. This can be convenient for repayment, but creates challenges when you seek to sell the home or if you need to refinance.

How HERO Loans Affect Your Loan Status

HERO loans are certainly beneficial if you want to make improvements to the home without writing a large upfront check to pay for the improvements. However, the problem is that the HERO loan becomes “superior” to all other loans on the home. This mean that if there is a financial problem and the homeowner can’t pay their bills, the mortgage companies have to wait in line until the government is paid back.

In almost all cases, tax liens of any kind are superior to mortgage loans and other types of debt. The government wants to make sure it gets paid, so it has made rules and regulations that require payment of tax liens before all other debts.

HERO loans can be used to make home energy upgrades, such as solar panels or new air conditioners.

Therefore, if a borrower has a mortgage and a HERO loan, and due to financial difficulty the property is being foreclosed, the HERO program would get the first share from the foreclosure funds. Anything left over would then be available to the mortgage lender. In some cases, the lender will only get a fraction of the money owed to them.

Thy simply don’t like to be second in line, so lenders are extremely hesitant to write mortgages towards homes with a HERO loan.

This creates two potential issues:

Issue 1: Difficulty Refinancing. Let’s say you purchased a home with a 30-year mortgage. Five years later, you took out a HERO loan to install solar panels. After another five years, interest rates have dropped so you decide to refinance but discover that because of the HERO loan, lenders are now unable (or unwilling) to write any mortgages on your home.

Issue 2: Difficulty Selling. Because it becomes part of the property taxes, the HERO loan is essentially to the house and not the homeowner. When you leave, the tax payment is passed on to whoever owns the home after you. Once again, mortgages towards your property will be second in line, so anyone interested in buying the home will struggle to find financing. The result is that you will have a hard time finding a qualified buyer and you may be unable to sell.

Getting Financing on a Home with HERO Loans: Look to the FHA or VA

If you are experiencing trouble refinancing or purchasing a home with a HERO loan, one of your best allies will be the Federal Housing Administration (FHA), which is a section of the Department of Housing and Urban Development (HUD). 

According to guidelines issued by the department, certain properties with PACE loans may be eligible for FHA-insured mortgages. However, the property needs to meet specific requirements, such as:

The property may only be subject to a lien that is superior to the FHA-backed mortgage, and no loan can be made on the property that would become superior to the FHA-mortgage. In other words, only the PACE loan can be superior.

There must be no terms or conditions that limit the sale or transfer to another party or homeowner. Legal restrictions on sales will generally require the consent of a third party will make the property ineligible for FHA-insured financing.

If the property is sold, which includes foreclosure sales, the PACE financing will stay with the property and become the responsibility of the new homeowners.

If you are eligible, you may also be able to get financing on a HERO-loan home with the Department of Veteran’s Affairs. Like the FHA, they have specific (and generally similar) requirements for insuring loans on homes with HERO programs.

Before the Sale: Required Disclosure and Appraisal

When you look to sell the home, you must ensure that you have proper disclosure of PACE and HERO obligations, including terms and conditions for the sale. The property sales contract will need to indicate whether or not the HERO tax obligation will remain with the property or if it will be paid off by the seller. If the obligation will remain, all the specific details of the HERO program must be disclosed to the new owner, and these details will need to be part of the sales contract.

The pre-sale requirements also include the appraisal. If the HERO tax obligation will remain with the home, then the appraiser must analyze and report the change in value to the property, whether positive or negative.

Guiding You Through the Complexities of HERO-Loan Financing

Finding financing for a home with a HERO loan obligation can be difficult. Make sure you are working with a qualified team that can help you understand all the details of the process.

Let the knowledgeable team at San Diego Purchase Loans help you find the right financing. Whether you are looking to refinance or purchase a home with a HERO obligation, we can help you through the entire process!

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I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”

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I was referred to Chad by my Realtor for a purchase of a new house. The experience with Chad and the team (I mainly worked with Juliann) was nothing short of outstanding. From start to finish there were always quick to respond and when needed, notify me of any new documentation that was required. There were very helpful explaining to me the pros and cons of different financing options as well as some other loan related issues, such as termite clearance outside the purchase contact and septic tank certification process. Overall, very knowledgeable and processional team. Loan preapproval was done in a single day and loan documents were ready for signing in 21 days, which was 9 days ahead of schedule. That never happened to me before.

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Chad Baker is Regional Manager for RPM Mortgage. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2016.
Got a question for Chad? Call (858) 353-8331 or submit your question online