The Quick Read: PACE debt sits on the property tax bill, and in most places it ranks ahead of a new first mortgage. So on a cash-out file, the usual outcome is payoff from the loan proceeds at closing. Lender criteria vary by program, and every file is reviewed individually.
- The PACE balance comes out of gross proceeds, so net cash to you shrinks by that amount.
- The payoff counts against the same 75% LTV ceiling on a cash-out refinance of a standard rental.
- A PACE payoff letter has to come from the PACE administrator, not the county tax office.
- Paying it off removes the assessment from the tax line, which can help the coverage ratio.
- Subordinate or unsecured solar debt is a different case from a tax assessment and is reviewed on its own terms. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Most investors who own a PACE-encumbered rental know it as the solar or energy loan that shows up on the tax bill. Few have thought about what it does to a refinance. Here is how the file works, step by step.
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What Is PACE Debt, and Why Does It Matter on a Cash-Out File?
PACE debt is an assessment, not an ordinary loan. The CFPB’s residential PACE rule page describes it as financing for home improvements that results in a tax assessment on the real property. You repay it through the property tax bill, and the obligation stays with the property if it transfers.
Lien priority is why lenders care. Fannie Mae’s Selling Guide notes that these assessments typically take automatic first-lien priority over previously recorded mortgages. In a foreclosure, the assessment gets paid first. A new lender cannot assume its first-lien position is safe while one sits on the property.
DSCR loans are non-agency. No agency rule dictates how a DSCR lender handles this. Each program’s guidelines decide it. Across the wholesale network, the working pattern is consistent: the lender does not want a senior assessment standing beside its new lien, so the payoff comes out of closing proceeds.
For the broader program picture, see Lendmire’s complete DSCR loans guide.
Key Terms Defined
- PACE: A financing program for energy or improvement work that is repaid as a tax assessment on the property.
- Super-priority lien: A lien that ranks ahead of earlier-recorded mortgages.
- Payoff letter: A written statement from the PACE administrator showing the amount needed to clear the assessment.
- Cash-out refinance: A new loan larger than the debts it pays off, returning cash to the borrower.
- PITIA: Principal, interest, taxes, insurance, and any association dues; the monthly obligation the rent is measured against.
- Release: The recorded document showing the assessment has been satisfied and removed.
How Does the Lender Handle PACE, Step by Step?
The lender treats PACE as a payoff item in a fixed sequence.
1. Detection. The title commitment and tax-bill review surface the assessment. It sits in the tax records, not the mortgage records. Borrowers sometimes forget it exists because it is billed with taxes.
2. Priority test. The lender asks whether the assessment ranks ahead of the new first lien. In most jurisdictions it does, so the lender will not leave it in place.
3. Payoff request. A payoff or lien-release letter is ordered from the PACE administrator. The county tax collector usually cannot give it.
4. Payoff from proceeds. The payoff goes onto the settlement statement and is deducted from gross loan proceeds, along with the existing mortgage and closing costs.
5. LTV check. The new loan must still fit the 75% cash-out ceiling on a standard rental. The PACE payoff, the old mortgage, and any cash back all draw from the same equity. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
6. Release and recording. Title pays the administrator, obtains the release, and the assessment comes off the tax roll. The new first lien then stands clean.
On a fresh purchase of a rental, the borrower usually owns for about 6 months before cash-out is available, measured from title recording. That seasoning applies regardless of PACE.
How Does the Payoff Change Your Net Cash?
Net cash falls one for one with the PACE payoff. The math runs in one direction: gross loan amount, minus the old mortgage, minus the PACE payoff, minus closing costs and any required reserves funding, equals cash to you.
Run the numbers on a rental valued at $400,000. The inputs below are modeled assumptions, not market data, and they are stated as shares of value so the math stays visible.
- Maximum new loan at the 75% cash-out ceiling: 75% of value.
- Existing mortgage payoff: 45% of value.
- PACE payoff: 6% of value.
- Closing costs and reserves funding: 3% of value.
- Cash to the borrower: 75 − 45 − 6 − 3 = 21% of value. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Without the PACE balance, the same file would return 27% of value. The assessment took nearly a quarter of the available cash. Now raise the PACE payoff to 27% of value. The same file returns 75 − 45 − 27 − 3 = 0% of value, which means no cash back at all. A small balance is a minor trim. A large one can erase the cash-out. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Equity available also depends on rent used for lender review, PITIA, reserves, and the LTV ceiling. It is not a guaranteed cash figure. The calculator on this site gives an illustrative estimate, not a quote.
Does the payoff count as cash-out or rate-and-term? Where the payoff comes out of a loan that also returns cash to the borrower, the file is a cash-out file and the 75% ceiling governs. A refinance that returns no cash can carry a higher ceiling, but a PACE payoff paired with cash back stays on the cash-out side. Programs differ on how they classify a payoff-only transaction, so confirm this with the lender up front.
How Does PACE Affect the DSCR Calculation?
The coverage ratio is monthly rent divided by PITIA. If the assessment stays on the property, its annual amount rides on the tax bill and raises the tax line in PITIA. That lowers coverage.
Payoff removes it. The tax line drops, but the new loan is larger than the old one, so the principal and interest side rises. The lender retests the ratio on the new payment. Net effect varies file by file, which is why the ratio should be run on the new structure, not the old one.
Many select programs start at 1.00 coverage, with stronger ratios opening better pricing and leverage. A separate select-lender path goes below 1.00, with leverage and terms adjusted. Clearing 1.00 is not the same as positive cash flow. Repairs, vacancy, management, and capex sit outside the calculation.
Which Scenario Are You In?
| Scenario | Likely path | Prepare | Watch-out |
|---|---|---|---|
| Small remaining balance | Pay off from proceeds | Payoff letter | Stale payoff amount |
| Large balance | Smaller cash-out or wait | Equity estimate | Cash-out may shrink to near zero |
| Balance exceeds proceeds | Bring cash or pay down first | Source of funds | Lender will not leave it in place |
| LLC-owned rental | Same payoff path | Entity documents | Payoff authority must match the owner |
For entity-held rentals, Lendmire’s piece How a DSCR Lender Handles a Trust or LLC at Cash-Out Closing covers the entity paperwork. Entity eligibility is subject to lender program requirements.
Where Does the General Rule Break?
Several edge cases change the answer.
Subordinate or unsecured structures. Fannie Mae’s guide says a PACE loan structured as a subordinate lien or unsecured loan may be underwritten to standard guidelines. A DSCR lender may be more flexible in the same way, but treatment varies program by program.
State-law exceptions. Rules on PACE liens differ by state, and some states have adopted exceptions to the general treatment of these assessments. Laws change, so check current state law before relying on any summary here.
Commercial PACE. C-PACE is a separate product. Senior lender consent is normally required, and the residential rules do not govern it.
Solar debt that is not PACE. A private solar loan secured by a fixture filing or a recorded deed of trust is a contract lien, not a tax assessment. It is reviewed under its own rules, and title work still has to surface it.
Thin equity. If the payoff eats most of the proceeds, the options are a smaller cash-out, waiting, or paying the balance down first.
One more point on federal rules. Ability-to-repay protections now apply to PACE borrowers, and the rule is effective March 1, 2026. It governs the PACE originator. It does not change lien priority, and it does not erase existing assessments.
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.
What Mistakes Derail These Files?
- Calling the wrong office. The payoff comes from the PACE administrator, not the county tax collector.
- Missing tax-roll timing. The current-year installment may still appear on the tax bill after payoff. Ask title how it will be handled.
- Assuming a partial payoff works. Programs generally want the assessment cleared, not reduced.
- Expecting subordination. For residential PACE, plan on payoff, not subordination.
- Forgetting undisclosed filings. Fixture filings from solar contractors can surface late in title work and stall the file.
- Assuming the old mortgage payoff releases PACE. It does not. PACE is a separate obligation billed through the tax account.
Document Checklist
- Current PACE payoff letter from the administrator, updated near closing
- Proof the debt is PACE (the assessment agreement or tax bill line)
- Recent tax bill
- Entity documents if the rental sits in an LLC
- Lease or rent evidence
- Insurance declarations page
- Reserves documentation, commonly around 6 months of PITIA, with about 9 months on loans above $1,500,000
Programs typically look for a credit score of around 660, with 700 and up opening the strongest leverage tiers and a 620 floor in parts of the network. Loan amounts run up to $3,000,000 on standard programs. Reserve and leverage figures vary by lender, loan size, and transaction type.
What Should the Investor Decide?
Decide before applying whether the cash-out still makes sense after the payoff. Pull the payoff letter first. Run the net-cash math with the 75% ceiling. Retest coverage on the new loan. If the proceeds do not cover the payoff plus your cash goal, shrink the request, wait, or pay the balance down.
A broker that shops multiple wholesale lenders can match a PACE-encumbered file to a program that fits the property, credit profile, and leverage. The right fit depends on your situation, and every file is underwritten individually.
Frequently Asked Questions
Will a DSCR lender close a cash-out loan with PACE on the property?
Usually, but the PACE balance is typically paid off from the proceeds rather than left in place. The assessment generally ranks ahead of the new first lien, so lenders do not want it standing beside their loan. Treatment varies by program and by how the PACE debt is structured.
Can the cash-out pay off the PACE balance?
Yes, that is the normal route. The payoff is deducted from gross proceeds on the settlement statement. The new loan still has to fit the 75% cash-out LTV ceiling on a standard rental, with the payoff counted inside it. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Who gives me the PACE payoff amount?
The PACE administrator issues the payoff or lien-release letter. The county tax office generally cannot. Request an updated statement near closing so the figure is not stale when title pays it.
Does paying off PACE reduce my cash-out?
Yes, one for one. Net cash equals the new loan, minus the old mortgage, minus the PACE payoff, minus costs. A large balance can shrink the cash-out considerably or leave little cash at all.
Does PACE count in the coverage ratio?
Yes, while it remains. The annual assessment rides on the tax bill and raises the tax line in PITIA, which lowers coverage. After payoff the tax line drops, but the lender retests the ratio on the new, larger loan.
What if the rental is owned through an LLC?
The payoff path is the same. The entity documents and the payoff authority have to match the titled owner, subject to lender program requirements.
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 through the quote request page.
Residential PACE liens are old news in some states and live issues in others, so the first step on any rental with solar on the tax bill is pulling the assessment details before pricing the cash-out.
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire, NMLS# 2371349, is a non-QM mortgage broker serving real estate investors in 41 markets, including Washington, D.C., through DSCR investor loan programs. Qualification is generally reviewed around the subject property’s rental income, not the borrower’s W-2 history — a practical fit for LLC-titled portfolios and self-employed investors. All scenarios remain subject to lender review and program guidelines. Two consecutive Scotsman Guide Top Mortgage Workplace recognitions (2025, 2026).
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References
1. CFPB – Residential PACE Financing
2. Fannie Mae Selling Guide B5-3.4-01
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: Can You Get Approved for a DSCR Cash-Out Refinance After Ninety Days of Ownership? · How to Keep Better Terms When Adding Cash Out to a DSCR Refinance · Is DSCR Cash-Out Worth It Over Agency on a 2–4 Unit Rental?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
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.