If you’re considering solar power for your home, you’ll need to crunch some numbers to decide how to pay for the equipment and installation costs. There are a number of solar loan options available, and knowing how to qualify for solar financing will help you determine the best fit for your finances.
A solar loan is a loan that covers the cost of installing a solar photovoltaic (PV) system on your house. With a solar loan, you spread the cost of the system out over time, which is good news considering the average residential solar system costs between $17,167 and $31,738, according to HomeAdvisor. The other advantage of a solar loan: You ultimately take ownership of the system once the loan is paid off.
The structure of a solar loan is similar to other loan types offered by banks and credit unions, allowing you to choose the loan term (how long it takes to pay it off), the interest rate and monthly payments. However, unlike a home equity loan or home equity line of credit (HELOC) which is secured by your home, you can choose a solar loan option that is unsecured.
A secured loan puts you at risk of losing your home if you default, while an unsecured loan isn’t tied to your home.
4 steps to qualify for a solar loan
Step 1: Decide if you want a secured or unsecured loan
The requirements to qualify for a secured or unsecured loan are different. You’ll typically pay a higher rate for an unsecured loan and have fewer years to repay the balance than a secured loan. If you choose a secured solar loan, it will be treated as a home equity loan.
Step 2: Shop for solar loan lenders
Solar loans are usually offered through:
- Credit unions
- State programs
- Utility providers
- Solar developers
- Private solar financing companies
Step 3: Learn solar loan requirements and terminology
The goal of solar systems is to save you money on your utility bills. However, there are some unique qualifying requirements and features you’ll need to understand when reviewing any solar loan offer:
- Credit score requirements. The minimum credit score for a solar loan is typically 680, which is higher than the minimum 620 score required to be preapproved for most traditional mortgage loans. That could spell trouble if you try to sell your home to low-credit-score buyers before your solar loan is paid off.
- Down payment. Solar loans are usually available with $0 to $3,000 down payment options. Borrowers making a higher down payment will typically have a lower monthly payment and shorter term.
- Escalation clause. Although more common with solar leases and PPA contracts, this clause allows lenders to increase your payment due to inflation and projected increases in electricity rates.
- Contract terms. Also called a duration or payback period, this is how long your payments are required — typically five to 20 years.
- Ownership transfer requirements. If you sell your home before your solar loan is paid off, make sure you understand the requirements for the new buyer to get approved to take over your loan.
Step 4: Make sure the savings benefit is worth the cost
Ideally, the monthly solar loan payment should be less than the amount you’ll save on our electric bill. If that’s not the case, you may want to pay off the balance faster or make a bigger down payment to create a positive cash flow sooner.
Pros and cons of a solar loan
- You own the solar system and can maintain and use it as needed
- You won’t be subjected to home improvement restrictions
- You will typically have a fixed monthly payment
- You will need to buy additional homeowners insurance to cover solar system damage
- Your loan won’t guarantee set electricity production terms
- You may have difficulty selling your home if buyers can’t qualify to take over the solar loan balance
Alternatives to solar loans
If you don’t want a separate loan to finance your solar panels, there are several energy-efficient mortgage programs available that allow you to roll in the cost of financing a solar system. The rates are typically lower than other solar loan options, according to the U.S. Department of Energy. Below we highlight several options.
Fannie Mae HomeStyle Energy Mortgage
Fannie Mae is a government-sponsored enterprise that sets guidelines for conventional loans and offers the HomeStyle Energy mortgage program that can be used to finance some or all of the cost of energy-efficient improvements, such as solar systems, disaster-proofing and installation of energy-efficient windows. Approved lenders offer this program for buying or refinancing a home.
Fannie Mae HomeReady Mortgage
The HomeReady program is a Fannie Mae home renovation loan program that can be used for home improvements besides energy-efficient upgrades. It can be combined with the HomeStyle Energy loan.
Freddie Mac GreenCHOICE Mortgage
Freddie Mac is a government-sponsored enterprise similar to Fannie Mae and offers the GreenCHOICE loan program for borrowers who want to finance energy-efficient improvements equal to 15% of the home’s after-improved value.
FHA energy-efficient mortgages
Besides offering flexible approval terms for credit-challenged homebuyers, the Federal Housing Administration (FHA) backs energy-efficient mortgages for borrowers that want to finance the cost of solar, wind and other energy-saving equipment.
If you’ve got a big chunk of equity, you can take out more than you currently owe on your mortgage and use the difference to pay for your solar system. Conventional and FHA cash-out refinances allow you to borrow up to 80% of your home’s value. Eligible military borrowers can borrow up to 90% of their home’s value with a loan backed by the U.S. Department of Veterans Affairs.
If you aren’t finding favorable solar loan terms, check with your bank to see if a home equity loan is more cost-effective. You’ll get the funds in a lump sum and typically have a fixed interest rate and stable monthly payment for the life of the loan.
Home equity line of credit
A home equity line of credit (HELOC) works like a credit card secured by your home. You can use the funds as needed, pay the balance to zero and reuse the credit line. However, access to your funds usually only lasts for 10 years (called the draw period), and once it ends, you pay the balance off in monthly installments.
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