The Quick Read: A PACE assessment is repaid through the property tax bill and usually ranks ahead of a new first mortgage, so on a DSCR cash-out the lender typically requires it paid off at closing, adjusts the terms, or declines the file, and any payoff comes out of your proceeds. Which path applies depends on the type of PACE, the lender, and your equity. Find the assessment early, because it changes the math.
- A new DSCR lender wants first-lien position, and PACE can sit ahead of it by statute.
- The common fix is a payoff at closing, which shrinks your net cash.
- If the assessment stays, its installment rides on the tax bill and lowers rent coverage.
- Cash-out on a standard rental tops out around 75% LTV across most of our network, so every payoff dollar competes with your cash.
- Commercial PACE works differently from residential PACE, and the type matters. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Key Terms Defined
PACE (Property Assessed Clean Energy): Financing for energy or similar upgrades, repaid as a special assessment on the property tax bill instead of through a normal loan payment.
Lien position: The order in which claims on a property get paid if it is sold or foreclosed. First position gets paid first.
Super-priority: A claim that jumps ahead of earlier-recorded mortgages because the law says it should. Property taxes work this way, and so can PACE.
DSCR (debt service coverage ratio): The monthly rent divided by the full monthly obligation of principal, interest, taxes, insurance, and any HOA dues. Lenders call that obligation PITIA.
Cash-out refinance: A new loan that pays off the old one and returns the leftover equity to you as cash.
Payoff statement: A document from the PACE administrator showing the exact amount needed to retire the assessment on a given day.
Subordination: An agreement where one lender agrees to rank behind another. A PACE administrator rarely agrees to this on request.
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What a PACE Assessment Means on a Rental
A PACE assessment is a tax assessment tied to the property, not to you. It shows up as a line on the county tax bill and as a recorded notice in the title record. That is why a title search catches it even when the owner forgets it exists.
Residential PACE is usually repaid over 10 to 20 years, according to Ballard Spahr’s consumer finance commentary. The same source notes that the repayment obligation stays with the property when it transfers. If you buy a rental with solar panels or an energy retrofit, you may be buying the assessment too.
Commercial PACE, often called C-PACE, is a separate track. Small multifamily and some mixed-use rentals can land in it, depending on how the state program classifies the property. Do not assume which side of the line your rental falls on. The title report and the tax bill will tell you.
Here is the practical point. A PACE assessment is not a second mortgage you can subordinate with a phone call. It is a tax-style claim, and the program administrator holds it.
Where Does PACE Sit in the Lien Stack?
On most properties, PACE ranks ahead of the mortgage that is already there. A federal housing agency’s request for input on PACE programs explains that state law lets the assessment take priority over a first mortgage at a tax sale or foreclosure sale. The same notice says PACE is not traditional second-mortgage or home-equity lending. Priming the first mortgage is the central problem.
For a cash-out lender, that is a deal issue. The lender is lending against the property and wants to know nothing can jump ahead of it. Here is how the stack typically looks on a rental carrying residential PACE.
| Position | Claim | What happens at cash-out |
|---|---|---|
| 1 | Property taxes | Stay current; paid through escrow |
| 1 (by statute) | PACE assessment | Paid off or specially approved |
| 2 | Existing mortgage | Paid off by the new loan |
| 3 | New DSCR first mortgage | Must record in first position |
| After | HELOC, judgment, other liens | Paid off or subordinated |
The new lender wants to be in first position. If PACE can sit ahead of it, the lender must either remove the assessment or decide to accept it. Lendmire’s piece DSCR Cash-Out Lien Position Requirements for a Note Secured by the Rental covers the general first-lien rules that this builds on.
A quick contrast helps. Agency-backed conventional mortgages generally will not take a refinance when a first-lien PACE assessment is present. That restriction helps explain why PACE properties often end up in non-agency channels.
How Do Lenders Treat a PACE Rental on a DSCR Cash-Out?
Lenders in the network generally land in one of three places. The lender, not a regulator, decides, so the answer can differ from one program to the next.
| Outcome | What it means | Effect on you |
|---|---|---|
| Payoff required | PACE retired at closing from proceeds | Less net cash |
| Left in place | Lender accepts it, usually with adjusted terms | Higher tax line, lower coverage |
| Declined | File does not fit the program | Pay off first or change plans |
Payoff at closing is the most common path. The title company pays the administrator from your loan proceeds, the assessment is released, and the new mortgage records in first position.
Leaving it in place is less common and depends on the program. A lender that accepts it may look harder at coverage and equity. Ask before you apply. Ask for the answer in writing, not just on a call.
Across the lenders we place files with, there is no single published PACE rule. That is why the first conversation should be about this one issue, not about the loan amount.
Most DSCR programs still review the file on property-level rental income covering the payment, subject to lender guidelines. Lien position is a separate test. You can clear the coverage number and still hit a wall on the lien. For a wider view of how the programs fit together, see the complete DSCR loans guide.
How Does PACE Change the Coverage Ratio?
If the assessment stays, its yearly installment is collected with property taxes. That raises the tax piece of PITIA and lowers rent coverage. The rent does not change, but the obligation grows.
If the assessment is paid off, it drops out of PITIA. Coverage improves, though your net proceeds shrink. Whether a payoff counts against the cash-out amount or the LTV calculation varies by lender.
Some context on where the ratio needs to land. A coverage ratio of 1.00 is where many select programs start, and stronger ratios open better pricing and leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. A PACE installment that stays on the bill can push a borderline file across that line.
One caution. Clearing 1.00 does not mean the rental has positive cash flow. DSCR compares rent to PITIA only, so repairs, vacancy, management, and utilities sit outside the calculation.
Worked Example in Percentages
Run the numbers on a hypothetical rental. These are modeled assumptions, not market data.
- Appraised value: 100%.
- Maximum cash-out loan on a standard rental: 75% LTV.
- Existing mortgage payoff: 50% of value.
- PACE payoff: 4% of value. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Without PACE, the gross cash to you is 25% of value (75% minus 50%), before closing costs and reserves. With the PACE payoff, that falls to about 21%. The assessment cost you four points of equity.
Now the coverage side. Say the property covers its full obligation at roughly 1.25x with no PACE. If the assessment stays and its installment is added to the tax line, the same rent might cover at something closer to 1.15x. Both clear a 1.00 floor. A thinner file might not.
(The two routes are rarely equal, and the right pick depends on how much you want the cash and how much you want the coverage.) Run both versions before you choose. The ratio and the equity pull in opposite directions.
Your cash also depends on reserves, which vary by lender, leverage, and loan size. They are commonly around 6 months of PITIA on a cash-out, stepping up on larger loans. Equity is not a guaranteed cash figure.
Step by Step: From Discovery to Closing
1. Order the title search early. The recorded notice or tax-bill line will surface the assessment. Do not wait for underwriting to find it.
2. Identify the type. Residential or commercial PACE changes who has to consent and what ranks senior.
3. Get the payoff statement. The program administrator issues it. It shows the balance for a specific day.
4. Pull the county tax bill. Confirm how much of the bill is the PACE installment.
5. Ask the lender how it treats PACE. Payoff at closing, stay in place, or decline.
6. Run the coverage ratio both ways. One run with the assessment on the tax line, one with it paid off.
7. Decide. Pay off now, pay from proceeds, or skip the cash-out for now.
8. Close. Title pays the administrator, the release records, and the new mortgage takes first position.
Found early, PACE is a line item. Found late, it can stall or end a closing. Seasoning matters too. Most programs expect about 6 months of ownership before a cash-out, measured from title recording, so a recent purchase with PACE attached needs planning.
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.
Pay It Off First, Pay From Proceeds, or Skip the Cash-Out?
| Path | Best when | Watch out for |
|---|---|---|
| Pay from proceeds | Plenty of equity after payoff | Net cash shrinks |
| Pay off first | Cash on hand; coverage is thin | Ties up cash before the loan |
| Leave it in place | Lender explicitly accepts it | Lower coverage, adjusted terms |
| Skip the cash-out | Equity too thin after payoff | Waiting costs you timing |
Paying from proceeds is the cleanest route. Paying off first helps when you need the coverage ratio to clear a floor, since the installment leaves the tax bill before the lender calculates anything.
If the numbers still do not work, a rate-and-term refinance or a later cash-out may fit better. A larger down payment on a purchase lowers the payment and can lift the ratio, but it never erases leverage caps, credit floors, or reserve rules.
Commercial PACE and Other Edge Cases
C-PACE is the biggest exception to the general picture. Under many state programs, existing mortgage holders must consent before the assessment closes, and only delinquent installments are senior, not the whole balance. Morgan Lewis notes that intercreditor agreements and escrow of the assessment are common in practice. That matters because the lender may ask for an agreement with the C-PACE holder rather than a straight payoff.
Eligibility varies by state, so do not assume a small rental can or cannot carry C-PACE.
Residential PACE faces a separate consumer-protection layer. A recent final rule regulates how residential PACE originators underwrite. It governs the PACE originator, not the DSCR lender. How it applies to non-owner-occupied rentals is a question for counsel, not a rule of thumb.
Other cases that come up on rentals:
- PACE-like loans without lien priority. If a program has no priming claim, the lien problem may not exist. Each lender still makes its own call.
- Solar liens and fixture filings. A UCC filing on solar equipment is a different instrument from a recorded assessment.
- Property types. Manufactured homes, log homes, and barndominiums are not offered in the network’s DSCR programs, with or without PACE.
Pre-existing mortgage waivers from older agency policies do not carry into DSCR programs. Treat them as history.
Common Mistakes
- Assuming a DSCR lender ignores PACE because personal income is not documented. Lien position and rent-to-PITIA still apply.
- Treating PACE like a second mortgage you can subordinate.
- Buying a rental with solar or energy upgrades without pulling the tax bill and title first.
- Running coverage only with PACE paid off, then discovering the lender wants it left in.
- Forgetting that payoff reduces cash, which can change whether the refinance is worth it at all.
- Missing that the assessment follows the property, not the owner, after a sale.
- Skipping a payoff statement and guessing the balance.
Questions to Ask Before You Apply
- Does the program require PACE paid off, or can it stay in place?
- If it can stay, how does the lender count the installment in PITIA?
- Does the payoff reduce my cash-out amount or count toward LTV?
- Is the assessment residential or commercial under my state program?
- What payoff document does the title company need, and who orders it?
- Do I need a recorded release before the new loan funds?
Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.
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. Programs are subject to lender guidelines and every file is underwritten individually.
Frequently Asked Questions
Does a PACE assessment stay with the property when I sell?
Usually yes. The obligation runs with the property and is repaid through the tax bill, so a buyer inherits it unless it is paid off at sale. That is why title work on a purchase should include the tax bill.
Can I pay off only part of a PACE assessment?
Possibly, but it depends on the program administrator and the lender. Many lenders want the lien removed or explicitly accepted, not trimmed. Ask for the payoff statement and the lender’s treatment before deciding.
Does paying off PACE improve my DSCR?
Often, yes. The installment leaves the tax line, so PITIA falls and the coverage number rises. The cost is lower net proceeds, and the trade-off should be run both ways before closing.
Is PACE the same as a solar lien?
No. A solar UCC filing is a claim on equipment, while PACE is a recorded assessment collected with property taxes. They can appear together on one rental, and a title search will show which you have.
Does it matter if I live out of state?
Where you live matters less than where the property sits. PACE rules vary by state and local program, and the title report shows what applies to the property. Pull the title and tax bill early rather than relying on the seller’s description.
A deeper walk-through of investment-property equity extraction lives in Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire (NMLS# 2371349), a non-QM mortgage broker serving investors in 41 markets including Washington, D.C., helps structure DSCR scenarios commonly evaluated around a property’s rental income rather than personal income paperwork, subject to lender guidelines. A Scotsman Guide Top Mortgage Workplace in 2025 and 2026, Lendmire places loans through wholesale investor lenders and is not a direct lender.
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References
1. Ballard Spahr consumer finance commentary on residential PACE
2. FHFA request for input on PACE programs
3. Morgan Lewis analysis of C-PACE financing
4. Final rule on residential PACE financing
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: Cash-Out Refinance Title Requirements on an Inherited Tenanted Rental · Probate and Title Requirements for an LLC-Held Inherited Rental Refinance · How to Stress-Test DSCR on a Short-Term Rental Cash-Out Refinance
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.