The Quick Read: Most investors with a PACE assessment on a rental do not have to choose between two separate loans. The choice is whether the lien gets cleared from new loan proceeds at closing, or from the investor’s own cash before the refinance starts. Both paths clear the lien. They differ in cash used, the loan size that results, and how clean the file looks to a lender.
- A PACE assessment is a tax-bill lien that typically ranks ahead of a mortgage, so most new first-lien lenders expect it cleared.
- Paying from cash-out proceeds keeps one transaction but shrinks the cash that reaches the owner.
- Paying first with outside cash gives a cleaner title and a smaller refinance, but needs liquid funds.
- On most files in the wholesale network, cash-out tops out around 75% LTV on a standard rental, with about 6 months of seasoning.
- Clearing the lien changes the tax line inside PITIA, which moves the coverage ratio.
The Honest Answer: Who Each Option Is For
Paying the lien from cash-out proceeds fits the owner who has real equity, wants one closing, and does not want to tie up savings. Paying it first with outside cash fits the owner who has liquidity, a thin equity cushion, or a file that needs a clean title before anyone reviews it.
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Neither path is better in every case. The right one turns on four things: equity left after payoff, rent coverage on the new loan, the seasoning clock on the property, and what the title commitment shows. A DSCR loan qualifies primarily on property-level rental income covering the payment, subject to lender guidelines, so the PACE balance matters twice. It reduces equity, and it changes the taxes inside the payment.
This piece covers the sequencing choice only. For the wider picture, see the complete DSCR loans guide.
Side-by-Side
| Factor | Cash-Out Pays the Lien | Pay the Lien First |
|---|---|---|
| Source of payoff funds | New loan proceeds | Owner’s own cash |
| Review basis | Property rent vs. new PITIA | Property rent vs. new PITIA |
| Transactions | One closing | Payoff, then a later refinance |
| Loan classification | Typically treated as cash-out | May allow a smaller, payoff-focused loan, by program |
| Equity needed | Enough left after payoff, costs, reserves | Less, since the lien is already gone |
| Title picture | Lien cleared through title at closing | Lien released before the lender looks |
| Reserves | About 6 months PITIA, about 9 above $1,500,000 | Same expectation on the later loan |
| Entity vesting | LLC vesting depends on program guidelines | Same |
| Timeline risk | Payoff statement must stay current | Release must show on the tax roll first |
This table compares general mechanics, not lender pricing. Both options are placeable through the wholesale network, and the “pay first” column reflects published industry norms on payoff and release rather than a separate program.
Why a PACE Lien Changes the Refinance
PACE is not an ordinary loan. The owner finances improvements through a special assessment on the real property, repaid through the property tax bill. As Mayer Brown’s analysis of the CFPB PACE rule describes it, repayment is secured by a tax lien with priority over existing and future mortgages.
The City of Anaheim’s PACE FAQ says the assessment has equal priority with regular property taxes and sits senior to mortgage debt. It also notes some lenders and buyers require the balance paid off at refinance or sale.
That is the whole problem for a new first-lien lender. A lien that jumps the line is a title issue. Most lenders will not fund behind it, so the usual fix is payoff at or before closing. Usual does not mean universal. Lender criteria vary, and the program in play decides.
One more point. The lien runs with the property, not the person. A prior owner’s solar or HVAC retrofit can show up on a rental you bought years ago. Pull the title commitment early.
How Agency Rules Compare
Agency guides show how seriously the market treats this lien. Fannie Mae’s Selling Guide says it will not purchase loans on properties with an outstanding PACE loan unless the program does not give priority over first mortgages. Freddie Mac’s retrofit guidance makes a similar point and notes that some programs create liens subordinate to the mortgage.
DSCR loans are not agency products. These rules do not govern them. Investor-program overlays decide, which is why a DSCR file should state “typically paid off at closing,” not “always.”
Option A: Let the Cash-Out Pay the Lien
The mechanics are straightforward. The lien shows on the tax bill and the title commitment. Title requests an itemized payoff from the PACE administrator. The new loan’s proceeds clear the lien at closing, and what is left reaches the owner.
On the file, the steps run like this:
1. Identify the lien. Confirm it is actually PACE and not a solar deed of trust or a UCC-1 filing. Those carry different lien rights.
2. Order the payoff. Ask for an itemized figure from the administrator, routed through title.
3. Underwrite on the property. Rent comes from the appraisal rent schedule and lease evidence. Coverage is rent against the new PITIA.
4. Rework the tax line. Removing the assessment drops it from the tax bill, so the taxes used in PITIA change.
5. Confirm the classification. Do not assume a rate-and-term label survives a PACE payoff. Many programs treat a payoff of this kind as cash-out, so the 75% cash-out LTV ceiling and seasoning rules apply. That mirrors the agency approach, where PACE payoffs needed special treatment because they otherwise look like cash back. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
The tradeoff: the payoff, closing costs and reserves all come out before cash reaches the owner. If the lien is large against a modest equity position, the net check can be small. The loan balance also rises with the payoff folded in. A larger balance means a weaker coverage ratio on the same rent.
When the Cash-Out Option Is the Better Fit
Cash-out pays the lien best in these situations:
- Real equity. The property sits well under the 75% LTV ceiling for a standard-rental cash-out, even after the payoff.
- Strong coverage. Rent clears the new payment with room. The removed assessment may help the taxes line, offsetting some of the larger balance.
- Limited liquidity. The owner would rather not drain savings or sell another asset to clear the lien.
- Seasoning already met. About 6 months of ownership, measured from title recording, is typically the expectation. Files that assume seasoning away get kicked back.
- A real use for the remaining cash. If the leftover proceeds fund the next acquisition or a capex project, one transaction is efficient.
Picture an investor holding a rental well past seasoning, with rent that supports coverage near 1.2x on the new balance. The PACE payoff is modest against the equity. Folding it into the cash-out is clean. One closing, one title policy, one lien position.
Option B: Pay the Lien First
Here the owner clears the assessment from savings or another source before any refinance. The administrator issues a payoff, the owner pays it, and the release should show up on the tax roll and title. The later DSCR refinance then starts with a cleaner commitment.
Two benefits stand out. First, the loan is smaller, so rent covers more of it and the ratio improves. Second, a lender reviewing the file sees no priority lien and fewer questions. Whether the later loan can be a payoff-focused refinance instead of cash-out is program-specific. Do not count on it.
The cost is outside cash and an extra step. The release also has to be verified, not assumed. A paid balance does not always clear the record automatically, so the post-payoff title search matters.
When Paying the Lien First Is the Better Fit
Paying first makes sense when:
- Equity is thin. The payoff plus costs would eat most of the proceeds, or push the new loan toward the 75% ceiling.
- Coverage is borderline. A smaller loan improves rental coverage. If the ratio sits near 1.00, the lower balance can matter. Select lenders in the network will look at coverage below 1.00 with leverage and terms adjusted, but a clean ratio keeps more options open.
- Title looks messy. Naming and recording of PACE varies by community. If the commitment is unclear, clear the lien first and let title confirm the release.
- Cash is available and idle. Outside funds sitting in an account earn little against a lien that must be paid anyway.
- The refinance is not urgent. If the owner can wait to refinance, there is room to clean up the record first.
Run the numbers on a duplex with a large assessment and modest equity. Folding the payoff into the new loan lifts the balance, drops coverage toward 1.0x, and leaves little cash. Paying from savings first keeps the loan small and the ratio stronger. Here the outside cash earns its keep.
What Changes in the Coverage Math
DSCR divides monthly rent by PITIA: principal, interest, taxes, insurance and any HOA dues. A PACE assessment sits in the tax bill, so it inflates the taxes line while the lien exists. Once it is gone, that line drops.
That cuts both ways. The payoff shrinks the tax portion but, if folded into the loan, raises principal and interest. Which effect wins depends on the size of the assessment, the new balance, and the rent. Run both versions before choosing. The illustrative calculator on the site can show the shape of the change, though it is an estimate, not a quote.
Clearing 1.00x also does not mean positive cash flow. Repairs, vacancy, management and capex sit outside the ratio.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
Edge Cases That Change the Answer
- Not all PACE is the same. Some programs create liens subordinate to the mortgage, as Freddie Mac notes. Confirm which program and statute apply before assuming seniority.
- Commercial PACE is different. C-PACE typically needs written mortgage-lender consent and is often non-accelerating, with only current and past-due payments enforceable. Some providers describe it as transferable on sale, which makes payoff less automatic on larger mixed-use or multifamily assets.
- Consent rules differ. The Florida PACE FAQ says residential consent is not required unless the amount financed exceeds 20 percent of the property’s just value, while commercial projects need consent.
- Geography. Residential PACE is concentrated in a handful of states. If your rental sits elsewhere, the lien may be rare, so check whether what you found is truly PACE.
- Delinquent assessments. Unpaid PACE is collected like a tax lien, which creates risk even when the mortgage is current.
- Vesting changes. Retitling into an LLC can disturb seasoning. LLC vesting is accepted subject to lender program eligibility, so sort out entity and seasoning before the file goes in.
- Property type. Manufactured homes, log homes and barndominiums are not offered in the network’s DSCR programs, with or without a lien.
Where Files Actually Get Stuck
The friction is almost never the loan type. It is documentation. A stale payoff statement. A title commitment that names the lien differently than the administrator does. A release recorded but not yet showing on the tax roll. Entity documents that do not match the vesting. Lease evidence that does not support the rent used.
Fresh payoff figures, a clean title search, and consistent entity paperwork give the lender fewer preventable gaps. That does not guarantee approval. It removes the reasons for a kickback.
Key Terms Defined
PACE assessment: A special tax assessment on real property, repaid through the tax bill, that typically ranks ahead of a mortgage.
Cash-out refinance: A new first-lien loan that pays off the old one and returns the difference to the owner.
PITIA: Principal, interest, taxes, insurance and association dues, the monthly obligation used in the coverage ratio.
Seasoning: The ownership period a lender expects before cash-out, about 6 months here, measured from title recording.
Payoff statement: The administrator’s itemized figure to clear the lien, valid only for a stated period.
A Balanced Verdict
Use the cash-out when equity is deep, coverage is comfortable and liquidity matters. Pay the lien first when equity is thin, coverage is borderline or title is unclear. When both feel close, price the file both ways. The better choice usually shows up in the ratio and the net proceeds.
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Reach the team at 828-256-2183 or request a quote through the quote page. Program terms vary by lender and every file is underwritten individually. This is not a commitment to lend.
Frequently Asked Questions
Can I leave a PACE lien in place and still do a DSCR cash-out?
Sometimes, but plan on payoff. Published sources describe payoff as typical at refinance, not universal. Whether a program allows the lien to stay depends on the lender, the PACE program and its lien priority. Treat retention as an exception to confirm early.
Does a PACE payoff count as cash-out?
Often yes. Many programs treat a payoff of this kind as cash-out, so the 75% LTV ceiling on a standard rental and the seasoning expectation of about 6 months apply. Confirm the classification before assuming a rate-and-term label.
Can I pay only part of the assessment?
It depends on the PACE administrator and the lender. Some lenders want a full payoff. Ask the administrator whether a partial payment is accepted and ask the lender whether a partial payoff clears the title issue.
Does paying the lien first improve my coverage ratio?
Paying it first can improve the ratio. A smaller new loan with the assessment gone from the tax line usually raises rent coverage. The effect depends on the assessment size and the rent, so compare both versions.
Does the lien matter if I hold the rental in an LLC?
Yes. The lien attaches to the property, not the owner. Entity vesting is handled subject to lender program eligibility, and the entity documents must match what title shows.
For the mechanics of pulling equity out of a rental property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage focused on DSCR investor financing, helping arrange programs through wholesale and investor-lending channels in 41 markets, including Washington, D.C. DSCR loans are evaluated by the lender on property cash flow rather than personal income, subject to lender guidelines, supporting LLC closings and accommodating investors with four or more financed properties. Scotsman Guide Top Mortgage Workplace in both 2025 and 2026.
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References
1. Mayer Brown — The CFPB Crosses the Finish Line to Regulate PACE Financing
3. Fannie Mae Selling Guide B5-3.4-01
4. Freddie Mac Single-Family: Refinancing and Energy Retrofit Programs
This article is part of Lendmire’s investment property cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Close a DSCR Cash-Out Refinance on a Rental in a Trust · Jumbo DSCR Cash-Out vs HELOC for a Retiree Buying Another Rental · How a DSCR Refinance Works on a First Rental You Already Own
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.