The Quick Read: A PACE assessment does not automatically block a VA cash-out refinance. VA’s own circular says a home with a PACE obligation may be eligible if the lender meets specific conditions. Many lenders add stricter rules than VA does, and some require the PACE balance to be paid off at closing. So you have two layers to clear: the standard VA cash-out rules, then the PACE-specific ones.
What Is a PACE Assessment, in Plain Words?
PACE stands for Property Assessed Clean Energy. A PACE assessment pays for home improvements such as solar panels or a new HVAC system. You repay it through your property tax bill, not to the PACE company directly.
That detail matters for a mortgage. VA’s PACE circular notes that PACE is generally collected and secured like a local special assessment. If you sell with PACE outstanding, the obligation may stay with the property, and the new owner pays the remainder. Terms differ by state, local government and program.
Is it a tax or is it debt? Regulators call it credit. The federal consumer-finance regulator’s summary of its PACE rule says PACE is treated as credit under federal lending law, with repayment-capacity requirements. Repayment through taxes does not change what it is. Contractors have sometimes pitched it as a government incentive. It isn’t one.
What Does a VA Cash-Out Refinance Require Before PACE Enters the Picture?
You need a certificate of eligibility (COE). VA decides eligibility, and service requirements are VA’s rules. The home must be your primary residence. Cash-out loans get full credit underwriting.
Here is the envelope I work in every week. Across the wholesale programs Lendmire places VA files with, a cash-out reaches up to 100% of the appraised value, including the financed funding fee. It can refinance any loan type into a VA loan. There is no mortgage insurance, and no VA loan limit applies with full entitlement. VA sets no minimum credit score, and the wholesale programs we use start at a 580 decision score. All of this is subject to lender guidelines and full file review.
The loan also needs a net tangible benefit, meaning the refinance has to leave you measurably better off. Seasoning applies too: the later of 210 days from your first payment and your sixth payment.
Residual income is the controlling test. That is the money left each month after your debts, taxes and living costs. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above VA’s table.
The funding fee is 2.15% on a first-use cash-out and 3.3% after that. It can be financed, and it is waived for veterans receiving compensation for a service-connected disability and other exempt groups.
For the program overview, see Lendmire’s VA cash-out refinance program page.
How Does PACE Change the File?
PACE adds a property-level question on top of those borrower-level tests. Here is how it plays out, step by step.
1. Find the obligation. It usually shows up on your tax bill or in public records. The lender needs the balance, the terms and any missed payments.
2. Test the structure. VA-guaranteed loans must be secured by a first lien. A PACE assessment looks like a tax lien, which is why it gets special handling. VA’s circular says encumbered properties may be eligible when the lender satisfies its conditions.
3. Order the appraisal. The appraiser must be told about the PACE terms so the value reflects them.
4. Underwrite the payment. The added tax payment becomes part of your household obligations. It feeds both debt-to-income and residual income.
5. Choose a path. Either pay the PACE off with cash-out proceeds, or leave it in place if the structure and the lender allow.
I read the circular’s conditions in practical terms. The PACE must be collected like a special assessment under state law. The property should not become subject to a claim ahead of the VA loan for the full PACE balance. A superior claim limited to delinquent scheduled payments is a different matter. Nothing in the terms may limit transferring the home. And the obligation must be visible in public records. Your lender confirms these against the circular itself.
Pay It Off or Leave It? Two Paths
| Item | Pay off at closing | Leave in place |
|---|---|---|
| First-lien question | Gone | Must meet VA’s conditions |
| Tax bill | PACE line drops off | PACE payment stays |
| Cash to you | Reduced by the payoff | Not reduced |
| Lender acceptance | Widely accepted | Lender-specific |
| Underwriting | No PACE payment to count | PACE payment counts |
Paying it off is the cleaner route. It removes the lien-priority conflict and the extra tax payment. The cost is that the payoff comes out of your proceeds, so you receive less cash.
Leaving it in place can work, but only where the structure meets VA’s conditions and your lender accepts it. Some lenders have loosened their stance over time. Others still say no. Some lenders set a stricter line than VA does, which is why the same home can be fine with one lender and declined by another.
Where the General Rule Breaks
Acceleration. If the PACE terms let the full balance jump ahead of the VA lien, the circular’s conditions are not met. In that case the PACE generally has to be paid off, or the home is a problem as structured.
Lender overlays. An overlay is a rule a lender adds on top of VA’s. Some wholesale guidelines require any PACE obligation to be paid at or before closing and not subordinated. Those are lender rules, not VA rules. A “no” from one lender is not a “no” from VA.
Other programs. FHA and conventional loans have their own PACE rules.
Commercial PACE. C-PACE is a different product. It is generally for commercial, industrial, agricultural and large multifamily property, not an owner-occupied home. If your paperwork says C-PACE, ask questions.
Escrow. A PACE payment on your tax bill may be collected through your mortgage escrow. The Federal Register notice on the CFPB rule notes servicers may need to collect PACE through escrow and could advance funds if a borrower cannot pay.
Unpaid PACE. The same notice says unpaid PACE is handled like unpaid taxes, through a tax sale or foreclosure. That is the priority risk a lender is protecting against.
Who Decides What?
| Question | Who decides |
|---|---|
| Are you eligible on service? | VA, through your COE |
| Does the PACE structure meet VA’s conditions? | The lender, against VA’s circular |
| Will the lender accept PACE staying? | The lender’s overlay |
| What is the home worth with PACE? | The VA appraiser |
| What is the exact payoff? | The PACE administrator and title |
This is the part most borrowers miss. VA sets a floor. The lender decides whether to go beyond it.
A Scenario in Percentages
Say you own a home with a solar PACE assessment and want cash-out. You plan to borrow up to 100% of appraised value, including the financed funding fee. Your PACE balance must be paid at closing, as your lender requires.
The payoff comes out of the loan proceeds first. Your existing mortgage gets paid off too. What remains is your cash. The larger the PACE balance, the smaller that check. And because the loan tops out at 100% of value, a big PACE payoff on a modest-equity home can leave very little cash at all.
The funding fee also rides on the new loan balance when you finance it. Your lender can show the numbers on your Loan Estimate and Closing Disclosure. The net tangible benefit test still applies, so the refinance has to make sense after the payoff.
What to Gather and What to Ask
Pull these before you apply:
- Your COE.
- The PACE agreement and your most recent tax bill.
- A recent PACE payoff or balance statement.
- Proof of the installed improvements, if requested.
- Your current mortgage statement.
Then ask any lender three questions. Do you allow PACE to remain, or do you require a payoff? Is the PACE payment counted in my debt and residual income? Will the appraiser be given the PACE terms?
Expect the lender to count the PACE payment as a household obligation. Because PACE is repaid through your property tax bill, as VA’s circular describes, your tax line grows by the PACE payment while the assessment is outstanding. Check your own bill for the exact amount.
If the Numbers Don’t Work
A few options are worth weighing:
- Choose a different lender. Overlays differ, so a second opinion can change the answer.
- Reduce the PACE balance first. A partial paydown from savings can leave more cash-out room.
- Check your equity. If the payoff eats nearly all your proceeds, a cash-out may not serve your goal.
- Consider timing. The new federal PACE rule takes effect on March 1, 2026, and a Middle District of Florida court upheld it. It regulates PACE companies, not VA lenders, so it won’t change VA underwriting. Check current status before relying on it.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
PACE: Property Assessed Clean Energy, a home-improvement financing repaid through your property tax bill.
First lien: The lender’s claim that gets paid first if the home is sold or foreclosed.
Net tangible benefit: A test showing the refinance leaves you better off.
Residual income: The money left each month after debts, taxes and living costs.
Seasoning: The waiting period between your first payment and a refinance.
Overlay: A rule a lender adds on top of VA’s.
Frequently Asked Questions
Can I get a VA cash-out refinance if my home has a PACE lien?
Sometimes. VA’s circular allows PACE-encumbered homes if the lender meets its conditions. Whether you qualify also depends on your COE, residual income, appraisal and the lender’s own overlay. Some lenders require a payoff at closing.
Does the PACE balance have to be paid off at closing?
Not under VA’s circular alone, but many lenders require it. If the structure fails VA’s lien-priority conditions, a payoff is generally the path. The payoff reduces your cash proceeds.
Will the PACE payment hurt my approval?
Yes, it can. The payment is added to your tax bill and counts as a household obligation. Residual income is the controlling test, so a strong residual figure helps. Everything is subject to full file review.
Does the CFPB’s PACE rule change how VA lenders underwrite?
No. The rule regulates PACE creditors and companies, not VA lenders. It does mean PACE borrowers get standard disclosures to compare costs, and PACE loans are excluded from the qualified-mortgage presumption.
Does PACE disappear if I sell?
Not necessarily. VA notes the obligation may stay with the property, and the buyer pays the remaining balance. Your payoff or sale terms will show how it is handled.
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. Call 828-256-2183.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your home or investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. VA Circular 26-16-18, PACE Loan Processing
2. CFPB Executive Summary, Residential PACE Financing Rule
3. Hunton, C-PACE financing in Virginia
4. Federal Register, Residential Property Assessed Clean Energy Financing
5. National Law Review, Florida district court upholds CFPB residential PACE rule
This article is part of Lendmire’s VA Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: VA Cash-Out Refinance Requirements for a Home With Leased Solar Panels · VA Cash-Out Requirements for a Condo Without VA Approval · Should a Veteran Consolidate Debt With a VA Cash-Out Refinance?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- 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.