Understanding Solar Leases in a California Mortgage
Imagine you found the perfect home in Fresno. It has a great backyard, an updated kitchen, and rooftop solar panels that promise lower energy bills. You submit your mortgage application, feeling confident. Then, your lender calls with bad news: your debt-to-income ratio (DTI) is too high to approve the loan. The culprit? The 'money-saving' solar panel lease, which adds a fixed monthly payment to your debt obligations.
This scenario is increasingly common across California, from Sacramento to San Diego. Homebuyers and even real estate agents often overlook that a solar lease or Power Purchase Agreement (PPA) is not just a utility agreement; it's a financial liability. Lenders must treat it as a recurring monthly debt, just like a car payment or a student loan.
Why is a Solar Lease Counted as Debt in My Mortgage Application?
A solar lease is a long-term agreement where you pay a fixed monthly fee to a solar company for the use of their equipment. From a mortgage lender's perspective, any recurring, non-cancellable payment obligation is a debt. They must include this payment when calculating your DTI ratio to assess your ability to afford the new mortgage payment alongside your existing financial commitments.
Your DTI is one of the most critical factors in a mortgage approval. It's calculated by dividing your total monthly debt payments (including the proposed housing payment and the solar lease) by your gross monthly income.
Example of DTI Impact in Sacramento:
- Gross Monthly Income: $9,000
- Proposed Mortgage (PITI): $3,200
- Car Payment: $500
- Credit Card Minimums: $200
- Solar Lease Payment: $180
Without the solar lease:
- Total Monthly Debt: $3,200 + $500 + $200 = $3,900
- DTI Ratio: ($3,900 / $9,000) = 43.3% (which is often acceptable)
With the solar lease:
- Total Monthly Debt: $3,200 + $500 + $200 + $180 = $4,080
- DTI Ratio: ($4,080 / $9,000) = 45.3%
That two-percent jump can be the difference between approval and denial, especially for conventional and FHA loans with strict DTI limits.
How is a Power Purchase Agreement (PPA) Treated?
A Power Purchase Agreement (PPA) is slightly different from a lease. Instead of paying for the equipment, you agree to buy the power the panels generate at a set price per kilowatt-hour (kWh). Your monthly payment can fluctuate based on energy production and usage.
Despite the variability, mortgage lenders treat a PPA almost identically to a lease. They will need to determine a stable monthly payment to use for qualifying purposes. This is typically done by reviewing the PPA contract or payment history to establish an average monthly cost, which is then added to your total monthly debts. The data, information, or policy mentioned here may vary over time.
Can the Solar Payment Be Excluded if It Lowers My Utility Bills?
This is a common and logical question, but the answer is no. Lenders are not permitted to 'offset' the solar lease debt with projected utility savings. Underwriting guidelines from entities like Fannie Mae and Freddie Mac are very clear: the lease is a debt, while utility costs are a separate living expense.
While you will almost certainly save money on your electric bill, the lender cannot use those potential savings to justify approving a higher debt load. The solar lease payment is a contractual obligation that must be paid regardless of how much energy the panels produce or how much you save on your utility bill.
What Documentation Will the Lender Require for the Solar Agreement?
To underwrite your loan, the lender will need to see the complete solar agreement. Be prepared to provide:
- The Full Lease or PPA Contract: This document outlines the payment amount, term length, escalator clauses (if any), and transferability conditions.
- A Copy of a Recent Utility Bill: This helps the lender verify the account and sometimes see the relationship between the solar system and the grid.
- Transferability Documents: The lender needs proof that the solar company will approve the transfer of the lease from the seller to you, the new homeowner. This is a critical step that must be completed before the loan can close.
Gathering these documents early in the process can prevent significant delays.
Does This Issue Affect FHA and Conventional Loans?
Yes, the treatment of solar leases as debt is standard across all major loan types, including those backed by the Federal Housing Administration (FHA) and conventional loans underwritten to Fannie Mae or Freddie Mac guidelines.
- Conventional Loans: Have strict DTI caps, often around 45%, though sometimes extending to 50% for borrowers with strong compensating factors (like excellent credit or large cash reserves) based on automated underwriting system findings. A solar lease can easily push a borrower over this limit. The data, information, or policy mentioned here may vary over time.
- FHA Loans: While FHA loans are known for being more flexible, they still count the solar payment in the DTI calculation. FHA guidelines also require confirmation that the lease can be transferred to the new owner and that it doesn't create a lien that takes priority over the mortgage.
No matter the loan program, the solar payment will be factored into your qualifications.
What Are My Options if the Lease Makes My DTI Too High?
If a solar lease is threatening your mortgage approval for a home in Fresno or elsewhere in California, you are not out of options. Here are several strategies to explore with your mortgage advisor and real estate agent.
1. The Seller Buys Out the Lease
The cleanest and most effective solution is for the seller to pay off the remainder of the solar lease at or before closing. This completely eliminates the debt from your DTI calculation. The cost of the buyout can be significant (often $15,000 to $30,000 or more), so this would need to be negotiated as part of your purchase offer. The seller might agree if they are highly motivated or if the home has been on the market for a while. The data, information, or policy mentioned here may vary over time.
2. Pay Down Other Debts
If the seller can't or won't buy out the lease, look at your own debts. Can you pay off a small personal loan, a credit card balance, or the last few payments on your car? Eliminating another monthly payment can create the room you need in your DTI ratio to absorb the solar payment.
3. Restructure Your Financing
Work with your mortgage advisor to see if a different loan program can help. Some non-QM (non-qualified mortgage) loans or bank portfolio loans may offer higher DTI allowances. Alternatively, making a larger down payment could improve your profile and potentially help you get an exception.
4. Negotiate the Purchase Price
You could also ask the seller for a price reduction equivalent to some or all of the lease buyout cost. While this doesn't remove the monthly payment from your DTI, the lower loan amount reduces your proposed mortgage payment, which in turn lowers your overall DTI.
The Advantage of Owned Solar Panels
The simplest scenario is when the solar panels are owned outright by the seller. If the system is fully paid off, it is considered part of the real estate—an asset, not a liability. There is no monthly payment to add to your DTI, and the panels simply transfer with the property like an appliance or a fixture. This makes the mortgage process significantly smoother and is a major selling point for any home with solar. If you're considering a home in California with a solar lease, don't let it derail your plans. A knowledgeable mortgage advisor can help you understand your options and structure your loan for success. Reach out to a professional to review the numbers and build a clear path to approval.
A solar lease adds complexity, but it doesn't have to stop your home purchase. Our experienced advisors can help navigate the details and find the right loan for your situation. Ready to see what's possible? Apply now to get a clear picture of your options.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
