Westcoe Realtors, Riverside Ca…This blog space has already published two blogs about the Hero Loan Financing program for energy related improvements to a home (2/24/14…Hero Financing Program, Homeowners Beware, and 7/25/14…Hero Financing Part II, Homeowners STILL Beware), and now we are at it again…because your average homeowner simply has no idea what a mess this loan program can be when you try to sell your home.
As a quick reminder, this loan program is for a homeowner to improve their home with energy efficient upgrades ( think new air conditioning, solar, windows, etc.), and finance the cost over a long period of time…and the lien shows on the property tax rolls and is paid with the property taxes twice per year. Our previous blog posts chronicle the potential pitfalls with this program (higher costs for the improvements, possible misrepresentation of the deductions, the assumability of the loan, etc.), but now there is a much bigger problem for a homeowner with this type of loan in place.
Fannie Mae and Freddie Mac, the two largest entities that control the rules and regulations for almost all new home loans on residential real estate, have now stated that they will not make a new loan to any buyer, or refinance an existing loan, on any property that has a Hero Loan in place on said property.
This means that any homeowner who has a Hero loan in place cannot refinance their home until the Hero loan is paid in full. It also means that any home seller who has a Hero loan in place will have to pay it off through escrow in order for a buyer to obtain a new loan to purchase. This edict covers almost ALL conventional, FHA, and VA loans.
In essence, any homeowner who has a Hero loan in place is basically a prisoner of that loan until it is paid off in full.
Why is this happening?
It’s happening because with the Hero loan balance and payments being coupled with the property taxes, then legally a case could be made that in the event of a foreclosure, the Hero loan would be paid off before the First Trust Deed loan since tax liens are first in line, and the home loans are second in line. All lenders know this, and are OK with it (as it relates to property taxes), but they are not OK with a new Hero loan potentially jumping ahead of their First Trust Deed Loans…especially when some of the Hero loans are very, very high.
So…the major loan players are saying “no mas”…they will simply not make any loans on a property until the Hero loan is paid in full. The banks will not take on the responsibility of having to pay off a Hero Loan if they ever have to foreclose on a home. Understand that all banks write their loans to Fannie and Freddie guidelines…so all banks are affected by this ruling.
What to do? Well, if you already have a Hero loan on your property, then just be aware that you will probably have to pay it off when you sell you home…and if you don’t have one of these loans, then read all our blogs and be sure you know what you are getting into, because from our point of view, this entire loan program is nothing more than a huge headache for a homeowner.
The law of unintended consequences, as exhibited by this loan program, is in full effect here for sure. Good luck.