The Quick Read: A PACE assessment cannot stay on the home after an FHA loan closes. The balance has to be paid off in the transaction, and an FHA cash-out refinance is one of the routes that allows it. The payoff comes out of the new loan, so it reduces the cash you net. Fit the PACE balance, the current mortgage payoff and your cash goal under the cash-out maximum, subject to lender guidelines and full file review.
What Is a PACE Assessment, and Why Does It Matter to FHA?
PACE is a way of financing energy and other approved home improvements through private financing paired with state and local governments. The HUD Handbook 4000.1 glossary says it is generally collected like a special assessment tax by the local government and secured like one against the property.
That tax-style collection is why homeowners miss it. The payment rides inside the property tax bill. Nobody from the PACE provider sends a separate statement. Many borrowers think of it as “just taxes” until a lender finds it.
Here is the catch. HUD treats it as a bar. Under the same glossary, a property that stays encumbered with a PACE obligation after closing is not eligible for FHA mortgage insurance. No waiver, no workaround. It has to be satisfied.
The obligation also follows the house. If the property sells with PACE outstanding, the obligation continues and the new owner makes the payments. The CFPB describes residential PACE loans as repaid through increased property tax payments over time.
Why Doesn’t FHA Insure a Home That Keeps Its PACE Lien?
Priority is the reason. HUD’s concern was losses to the insurance fund because of the assessment’s priority lien position in a default. The Federal Register notice on PACE notes the obligation is not a traditional second mortgage or home equity loan, and in many places it holds super-priority status. It can sit ahead of the first mortgage.
HUD’s policy came out of a 2017 HUD mortgagee letter. That letter reversed a short-lived 2016 policy that had let some PACE properties stay insured. It has since been superseded in full by Handbook 4000.1, so the Handbook is the live rule and the letter is where it started.
Where Does the Cash-Out Refinance Fit?
HUD’s guidance says PACE obligations are existing debt that can be paid off with a rate-and-term refinance, and that the policy allowing a cash-out refinance to pay off PACE stays unchanged. So cash-out is a valid route. It is not the only one.
| Route | Can it clear PACE? | What to know |
|---|---|---|
| FHA cash-out refinance | Yes, per HUD | Payoff reduces your net cash |
| FHA rate-and-term refinance | Yes, per HUD | No cash goal, fits if equity is thin |
| FHA Streamline | Verify with underwriting | Lender treatment varies |
| Keep the loan, pay PACE yourself | Depends | Money from your own funds |
The Streamline row deserves a flag. Across the wholesale programs Lendmire works with, some lenders do not allow the PACE balance inside a Streamline’s maximum mortgage. That is a lender-level treatment, not a HUD rule you can count on either way. Confirm it with underwriting before you choose that path.
Pick cash-out only if you want cash and you fit the cash-out rules. If you only want PACE gone, rate-and-term can do the job with less equity pressure.
What Does the FHA Cash-Out Need From the Home?
The envelope matters before you chase the PACE payoff. Across the wholesale programs we place files with, the FHA cash-out reaches 80% LTV on a home you have owned and occupied for 12 months before the case number. The minimum decision score on the programs Lendmire places is 580, subject to lender guidelines. Ratios start at 31/43 with no compensating factors and can reach 40/50 at the top tier with documented factors. The automated finding governs most files. County loan limits apply.
Mortgage insurance applies too. The upfront premium is 1.75% of the base loan and is financed. The annual premium runs from 0.15% to 0.75% of the balance depending on term, 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. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Here is the point for this article. The PACE payoff sits inside that 80% ceiling. The new loan has to cover the first mortgage payoff, the PACE payoff and your cash, all under the cap. Every dollar of PACE balance is a dollar of equity you cannot take out as cash.
If you want the program overview first, Lendmire’s FHA cash-out refinance program page lays out how the pieces fit.
Step by Step: Clearing the PACE Assessment
This is the sequence a clean file follows.
1. Find out what you owe. Pull the PACE agreement and your latest property tax statement. Note the administrator’s name. If your tax bill looks high for the neighborhood, the PACE line is usually why.
2. Request a payoff statement. The PACE administrator or the local tax collector issues it. Interest and fees accrue, so the figure has a shelf life. Ask for the good-through date.
3. Tell the loan officer up front. The lender needs to know before the appraisal order, not after. Undisclosed PACE is a common reason these files stall.
4. Lender notifies the appraiser. If the lender determines PACE is present, it tells the appraiser the obligation will be paid off as a condition of loan approval. The appraiser reviews tax records for the outstanding amount, and flags energy-related components.
5. Appraisal reports the balance. HUD’s appraisal language requires the appraiser to report the outstanding PACE amount. The value is developed on the assumption that the obligation is extinguished.
6. Title review. The lender checks whether title is impaired by the PACE obligation. A title search and the tax records are where the assessment shows up.
7. Size the loan. Add the first-mortgage payoff, the PACE payoff, financed mortgage insurance and your cash goal. Check the total against the 80% cap. If it fits, you proceed. If not, see the equity section below.
8. Pay it off at closing. The settlement agent pays the PACE balance from new loan proceeds. The assessment is satisfied, and the lien release follows.
9. Confirm the release. Make sure the PACE lien release and the updated tax roll are recorded. The bill should drop the assessment line, and your new escrow should reflect that.
Worked Example (No Dollars, Just Proportions)
Say a home appraises at a value that supports the 80% cash-out ceiling. Your existing mortgage uses a large share of that ceiling. The PACE balance takes another slice. Financed mortgage insurance takes a small one. What is left is your cash. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Now say the PACE balance is a bigger slice than expected, because the payoff statement included accrued interest. Your cash shrinks by that difference. Nothing else about the loan changes. This is why a fresh payoff statement matters. A stale one understates the cost, and the shortfall appears at closing.
Where Do Files Break?
| Problem | Why it happens | Fix |
|---|---|---|
| PACE not found until late | Borrower treated it as a tax | Disclose at application |
| Stale payoff figure | Interest and fees accrue | Refresh it before closing |
| Appraisal misses PACE | Appraiser not notified | Lender notice to appraiser |
| Title surprise | Assessment recorded differently | Order title early |
| Loan exceeds the cap | PACE eats equity | Reduce cash or change route |
| Delinquent PACE | Missed tax payments | Bring current first |
Delinquency is its own problem. The CFPB reported that PACE loans cause an increase in borrowers falling behind on their mortgage payments, along with other negative credit outcomes. If your property taxes are behind, bring them current before applying. Late payments can also affect your credit profile and the decision score.
Also look at your current escrow. For an existing FHA loan, HUD’s handbook text treats PACE as an escrowed special assessment. Your escrow history may already show it.
What If You Don’t Have Enough Equity?
Run this as a decision list.
- If the total exceeds 80% LTV: reduce the cash you want, or take none and go rate-and-term. HUD allows that route for PACE payoff, and the ceiling is higher at up to 97.75% on a principal residence occupied for the previous twelve months.
- If you cannot meet the 12-month ownership and occupancy test: the cash-out is not available yet. Waiting, or paying the PACE balance yourself, may be the path.
- If PACE payments are delinquent: cure the delinquency first.
- If you want to keep the PACE: FHA will not insure the loan. Look at other loan types, which treat PACE differently. Conventional guidelines, for example, do not simply ban it. Fannie Mae will not buy a loan with outstanding PACE unless the terms do not give it priority over the first mortgage, per its Selling Guide. Different rules, different file.
Avoid the “partial payoff” idea. If any PACE obligation remains after closing, HUD’s rule is not met.
Documents to Gather Before You Apply
- The PACE agreement and the assessment schedule
- A current payoff statement with a good-through date
- Your latest property tax bill
- Mortgage statement for the existing loan
- Proof of ownership and occupancy for the last 12 months
- Contact details for the PACE administrator
Key Terms Defined
PACE: A financing tool for home improvements repaid through the property tax bill and secured by the property.
Super-priority lien: A claim that can rank ahead of a first mortgage in a default.
Payoff statement: A written figure from the PACE administrator or tax collector showing what clears the obligation on a given date.
Cash-out refinance: A new mortgage that pays off the old loan and any other debt, and returns the leftover equity as cash.
Rate-and-term refinance: A new mortgage that replaces the old one without a cash goal.
Lien release: The recorded document showing a claim on the property is cleared.
Common Misconceptions
“PACE is just a tax, so it does not matter.” It is collected like a tax, but HUD makes it a bar to FHA insurance.
“I can refinance and keep it.” You cannot. It has to be paid off.
“FHA allows PACE homes.” A 2016 policy did. It was reversed.
“It disappears if I sell.” It stays with the property unless paid off.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Can I do an FHA cash-out refinance if I have a PACE assessment?
Yes, if the PACE balance is paid off in the transaction. HUD’s guidance says the policy allowing a cash-out refinance to pay off PACE stays unchanged. The payoff comes out of your equity and proceeds, so your net cash is lower. Approval is subject to lender guidelines and full file review.
Does the PACE payoff count toward the loan maximum?
Yes. The new loan includes the first-mortgage payoff, the PACE payoff and any cash to you. All of it has to fit under the 80% cash-out ceiling for this program, so a larger PACE balance leaves less room for cash. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Is rate-and-term better than cash-out for clearing PACE?
It depends on your goal. HUD also allows rate-and-term to pay off PACE. If you want cash and have the equity, cash-out fits. If you only want the assessment gone and equity is tight, rate-and-term can work better, since it reaches up to 97.75% on a principal residence occupied for the previous twelve months.
Can I use an FHA Streamline to pay off PACE?
Verify with underwriting. Lender treatment varies, and some do not allow the balance inside a Streamline’s maximum mortgage. Do not assume either way.
What happens if I am behind on PACE payments?
Bring it current first. Delinquent PACE signals tax trouble, can affect title and can hurt credit. Clearing it before you apply avoids a file stall.
Next Step
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. A mortgage broker arranges the file through wholesale lenders, so the PACE payoff, appraisal and title questions get settled before they cost you cash at closing. Start with a payoff statement. Everything else depends on that number.
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.
For the program’s current guidelines, see FHA loan programs.
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References
1. HUD Handbook 4000.1 Glossary (PACE definition)
2. CFPB proposed PACE rule press release
3. Federal Register, FHFA PACE notice
4. Fannie Mae Selling Guide B5-3.4-01
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 vs FHA 203k Refinance When the Appraisal Decides · FHA Cash-Out Refinance Waiting Period After a Withdrawn Listing · Can an FHA Streamline Refinance Give You Cash Out?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.