The Quick Read: An FHA loan can’t be made on a home that still carries a PACE assessment after closing, but a cash-out refinance is one way to clear that assessment and still get FHA insurance. The new loan pays off the old mortgage and the PACE balance at closing, and whatever is left under the loan-to-value cap goes to you. A big PACE balance leaves little or no cash.
Key Takeaways
- The PACE balance has to be paid off through the new loan. It can’t stay on the property.
- The FHA cash-out reaches 80% of the home’s value, on a home you’ve owned and lived in for 12 months before the case number.
- The appraiser values the home as if the PACE were already gone.
- Every dollar of PACE payoff comes out of the same 80% ceiling that sets your cash.
- Streamline and rate-and-term refinances are different tools. The table below shows which fits which situation.
What a PACE Assessment Is
PACE stands for Property Assessed Clean Energy. A private company funds a home improvement, usually solar panels, a new HVAC system, windows or a roof. A local government collects the repayment on your property tax bill.
That tax-bill setup is why PACE gets confused with ordinary taxes. It isn’t one. You chose it, and it’s a financing obligation.
Two features matter for a refinance:
- It usually ranks ahead of your mortgage. If the home goes to foreclosure, the assessment generally gets paid first.
- It stays with the property. If you sell, the balance doesn’t disappear. The next owner and the next lender both inherit it.
You’ll find it on your tax bill as a special assessment line. Often it’s rolled into an escrowed payment, so many homeowners don’t see it as a separate item until they refinance.
Why FHA Won’t Insure a Loan With PACE Still Attached
FHA insurance protects the lender if the borrower defaults. A lien that jumps ahead of the FHA mortgage weakens that protection. So FHA’s policy says the property can’t be encumbered with PACE once the new loan is in place.
That rule blocks the loan only if the assessment survives closing. It doesn’t block the borrower. If the PACE balance is paid off as part of the transaction, the FHA lien takes first position and the policy is met.
Many homeowners hear “FHA doesn’t allow PACE” from a lender and stop there. The accurate version is narrower. FHA doesn’t allow PACE to remain. It does allow PACE to be retired.
How the Payoff Works Inside a Cash-Out Refinance
The FHA cash-out refinance is built to turn equity into cash and retire debt in the same step. Lendmire’s FHA cash-out refinance program page covers the basic structure. Here is how a PACE payoff fits inside it.
On the wholesale programs Lendmire places files with, the FHA cash-out reaches 80% loan-to-value. The home must be owned and occupied as your principal residence for 12 months before the case number is assigned. County loan limits apply. Those limits change each year, so they’re set by the lender at the time of the file.
The loan has to cover several things, in this order of importance:
1. Your existing first mortgage payoff.
2. The PACE payoff.
3. Closing costs and the financed upfront mortgage insurance premium (1.75% of the base loan).
4. Any remaining cash to you.
The first three are fixed obligations. Cash to you is whatever is left under the ceiling. Nothing in that structure lets you carry the assessment forward.
A Modeled Example in Percentages
This is a modeled scenario, not market data. Say the appraised value is the full 100%. The existing mortgage balance is 55% of that value. The PACE balance is 8%. The cash-out loan can reach 80%.
Add the two payoffs: 63%. Subtract from 80% and about 17% of the value remains before closing costs and the financed premium. Those take a further slice. What survives is your cash.
Now change one input. If the PACE balance were 20% instead of 8%, the payoffs total 75% and only about 5% remains before costs. Costs could consume it. The refinance might still work as a way to clear the assessment, but it wouldn’t put cash in your pocket.
The PACE balance moves your cash one-for-one. A homeowner who treats this refinance as a cash event should get the payoff figure early, before deciding.
Which FHA Refinance Can Pay Off PACE?
The cash-out isn’t the only FHA refinance. Three exist, and they differ on appraisal, cash and PACE treatment.
| Factor | Cash-Out | Rate-and-Term | Streamline |
|---|---|---|---|
| Maximum leverage | 80% LTV | 97.75% (principal residence) | Existing FHA loan only |
| Cash to borrower | Yes, under the cap | Not the purpose | No |
| Appraisal | Yes | Yes | None |
| PACE payoff | Allowed | Allowed | Confirm with lender |
| Residency test | 12 months owned and occupied | 12 months occupied | Existing FHA loan |
The rate-and-term row has a trap. It reaches a much higher LTV, so it can absorb a bigger PACE balance. It doesn’t pay you cash. If your goal is to clear the assessment and nothing else, it can fit better than the cash-out.
The Streamline is the cell to treat carefully. It has no appraisal and a limited credit review, and lenders commonly don’t let a PACE payoff ride on it. A homeowner with an existing FHA loan who added PACE later may expect a Streamline to fix it. Ask the lender first. Expect the answer to point toward a full refinance.
What the Lender Needs From You
PACE adds a few documents to an ordinary cash-out file. In practice, expect these:
- The PACE agreement, so the lender sees the original terms.
- The most recent property tax bill, which shows the assessment line.
- A current payoff statement from the PACE administrator.
- Proof of the 12-month ownership and occupancy period, plus the usual income, asset and credit documents.
The payoff statement is the weak point. It has a good-through date. If closing slips past that date, the figure changes and the lender needs a new one. A payoff that looks small on paper can grow when interest and fees roll forward. Request it early and ask for the per-day figure.
Credit and ratios follow the program’s usual rules. The base ratio pair is 31/43 (housing and total debt to income). Documented compensating factors can raise that to 40/50 at the top tier, and the automated finding governs most files. A PACE payoff removes the assessment from your tax line, but the new loan is larger and carries FHA mortgage insurance. Your monthly obligation changes shape. Don’t assume it gets smaller.
Appraisal and Title
On a PACE file, the appraiser reports the outstanding assessment and values the home as if it had been extinguished. That makes sense. The assessment is leaving at closing, so the value that supports the new loan shouldn’t be reduced by it.
Improvements funded by the PACE loan, such as solar, can raise value. Appraisers treat them case by case. A system that is leased or owned differently from the home may not count the way an owner would expect, so ask how the lender’s appraiser handles it.
On title, the goal is a clean result. The payoff goes to the PACE administrator at closing, and the assessment should be released so the first lien position is clear. If the payoff doesn’t clear or the lien still shows on title, the file can’t close as FHA. Settlement reconciliation matters here: the closing figures need to match the payoff statement to the penny.
Where the Rule Comes From
The controlling document is HUD Mortgagee Letter 2017-18. It says properties encumbered with PACE obligations are no longer eligible for FHA-insured forward mortgages. It also says PACE obligations are existing debt that may be paid off using a rate-and-term refinance, and that policies allowing a cash-out refinance to pay off PACE remain unchanged. HUD’s stated worry is the priority lien status given to these assessments in a default.
That letter reversed an earlier, looser policy. For a short period FHA allowed PACE-encumbered homes if the assessment was collected like a special assessment. Some web articles still describe that looser policy. Treat those as out of date.
HUD’s handbook glossary defines PACE as financing for energy and other approved improvements, with repayment collected by the local government rather than paid directly to the party that provided the financing. The same glossary notes the obligation continues with the property after a sale.
Edge Cases Where the General Rule Bends
A subordinate-lien PACE program. Some state programs rank behind the mortgage instead of ahead of it. That might suggest FHA would tolerate it. The FHA letter doesn’t carve out an exception, so a property that stays encumbered is still ineligible. Plan on payoff either way.
An existing FHA borrower who added PACE later. Nothing stops an FHA borrower from taking on PACE after closing. A later refinance then has to clear it. This is the most common route into this situation.
Reverse mortgages. A home that will stay encumbered with PACE can’t get an FHA-insured reverse mortgage. The payoff is a required obligation at closing and may come out of the reverse mortgage proceeds.
Purchases. On a purchase, the seller has to satisfy the PACE at or before closing. The assessment doesn’t pass to the buyer’s FHA loan.
Occupancy. The FHA cash-out is for your principal residence. A rental or second home changes the leverage and the program entirely.
Conventional loans. Conventional programs have their own PACE rules, and some allow a limited cash-out structure in which the assessment can stay in some cases. FHA has no matching carve-out. Don’t borrow conventional advice for an FHA file.
Costs and Tradeoffs
A payoff does three things at once.
- It removes the assessment line from your property tax bill.
- It grows the mortgage balance, because the payoff is financed.
- It adds FHA mortgage insurance. The upfront premium is 1.75% of the base loan and is financed. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. On a thirty-year loan above 90% LTV it lasts for the term. At or below 90% it ends after eleven years. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Those premiums are program facts, not a quote. The mix is a tradeoff, not a savings pitch. You swap a tax-bill obligation for a mortgage obligation and pay FHA premiums to do it.
The CFPB’s final-rule announcement said PACE raised borrowers’ property taxes by about 88 percent, that PACE borrowers were more likely to fall behind on their first mortgage, and that most were eligible for other financing. That’s a useful reason to look hard at the numbers before and after.
A cash-out also adds a hard inquiry and a new tradeline, and it resets the equity you hold. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
The CFPB has also issued a residential PACE financing rule with a March 2026 effective date. Its executive summary says it treats PACE as credit and adds ability-to-repay requirements. That rule governs the companies that originate PACE. It doesn’t change the FHA refinance, and its current status is something to confirm on the CFPB page rather than assume.
Why You Hear Conflicting Advice
Three things cause most of the mixed messages.
1. Old policy. The pre-reversal rule is still described on older pages.
2. Lender overlays. One lender says no to a Streamline with PACE. Another mentions a rule that applies to conventional files only. Neither is the FHA cash-out answer.
3. State differences. PACE programs vary by state and by whether they rank ahead of the mortgage.
If a lender says it can’t be done, ask which refinance type they mean. “Not on a Streamline” and “not on FHA” are different statements.
Key Terms Defined
PACE assessment: A financing obligation for home improvements that is repaid through your property tax bill.
Cash-out refinance: A new mortgage larger than the old one, where the extra funds pay other debts or go to you.
Lien priority: The order in which claims get paid if the home is sold in a default.
Payoff statement: A written figure from the PACE administrator showing what clears the balance through a stated date.
Loan-to-value (LTV): The loan amount divided by the home’s appraised value.
Case number: The FHA identifier assigned to the loan, used to measure the 12-month ownership and occupancy period.
What the Decision Looks Like in Practice
Start with the payoff statement. It sets the whole file. Then run three questions.
1. Do you meet the 12-month ownership and occupancy test? If not, a cash-out isn’t open yet.
2. Does the PACE payoff plus your current mortgage fit under 80% of value? If it only fits with nothing left over, the refinance clears the assessment but pays no cash.
3. Is cash the goal, or is the payoff the goal? If the payoff is the goal and equity is thin, the rate-and-term refinance reaches higher leverage.
Then compare the full picture: the new balance, the mortgage insurance and the tax-bill change, against what the PACE costs you now. Sometimes keeping the assessment and not refinancing is the better call. FHA isn’t forcing you to refinance. It only decides whether FHA can be the new loan.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Every figure here is subject to lender guidelines and full file review, and none of it is a commitment to lend.
Frequently Asked Questions
Can I keep my PACE assessment and still get an FHA loan?
No. FHA won’t insure a loan on a property that still carries PACE after closing. The assessment has to be paid off through the transaction, and a cash-out or rate-and-term refinance can do that.
Can I use an FHA Streamline to clear PACE?
Usually not. The Streamline has no appraisal and a limited credit review, and lenders commonly exclude PACE payoff from it. If you want to remove the assessment, a full refinance is the safer path. Confirm with the lender before you plan around a Streamline.
Does paying off PACE reduce the cash I receive?
Yes, dollar for dollar. The PACE payoff comes out of the same 80% ceiling as your current mortgage and closing costs, so a larger assessment leaves less to you. On a thin-equity home it can leave none.
How do I get a payoff statement?
Contact the PACE administrator named on your agreement or tax bill and ask for a payoff figure good through a specific date, with a per-day amount. Give it to your loan officer early. A payoff that expires before closing has to be reissued.
Do conventional rules apply to an FHA file?
No. Conventional programs have their own PACE treatment, and some allow structures FHA doesn’t. Advice that mentions a limited cash-out or leaving PACE in place is describing conventional rules.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD Mortgagee Letter 2017-18 on PACE obligations
2. HUD Handbook 4000.1 glossary (PACE definition)
3. CFPB announcement of the final PACE rule
4. CFPB Residential PACE Financing final rule
5. CFPB PACE rule executive summary
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: FHA Cash-Out Refinance Documentation for a Locked-in Homeowner · How to Get an FHA Cash-Out When Heirs Will Not Sell · Should a Veteran Refinance an FHA Loan Into a VA Cash-Out?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.