As the world shifts towards renewable energy, more and more people are turning to solar power as an alternative energy source. Investing in solar panels is a significant move towards utilizing renewable energy.
Solar energy can also lead to lower electricity bills and may increase the value of your property.
However, the upfront costs of installing solar panels can be steep, leading many homeowners to explore financing options such as solar loans.
While solar loans can help make the transition to solar power more affordable, some homeowners may wonder how they will impact their debt-to-income (DTI) ratio.
How Does Taking Out A Solar Loan Impact Your Debt-To-Income Ratio?
Installing solar panels on your home can be a great way to lower your energy bills and reduce your carbon footprint However, the upfront cost of purchasing and installing a solar system can be steep – anywhere from $10,000 to $25,000 depending on the size of your system
Many homeowners turn to solar loans as an affordable way to finance their solar panel installation. But how does taking out a solar loan impact your debt-to-income (DTI) ratio? In this article we’ll explain what debt-to-income ratio is how a solar loan can affect it, and tips for maintaining a healthy DTI when going solar.
What is Debt-to-Income Ratio?
Your debt-to-income ratio compares the amount of debt you have each month to your gross monthly income. It’s calculated by dividing your total monthly debt payments by your gross monthly income.
For example, if you have:
- A mortgage payment of $1,500
- A car payment of $350
- A credit card payment of $200
- And a gross monthly income of $5,000
Your DTI would be:
($1,500 + $350 + $200) / $5,000 = 24%
Lenders use your DTI to determine how much risk you pose as a borrower. The lower your DTI, the less financial risk you have each month. Most lenders prefer a DTI of 36% or lower. However, requirements can vary by lender.
How Does a Solar Loan Affect Your DTI?
When you take out a solar loan, it increases your monthly debt obligations. This means your DTI ratio goes up.
For example, let’s say your current DTI is 24% with the same debt and income from the example above. Then you take out a $15,000 solar loan at 4% interest over 12 years. Your new monthly solar loan payment would be around $140.
Now your monthly debt obligations look like:
- Mortgage payment: $1,500
- Car payment: $350
- Credit card payment: $200
- Solar loan payment: $140
Your new total monthly debt payment is $2,190. With your $5,000 monthly income, your new DTI is:
$2,190 / $5,000 = 43%
As you can see, the solar loan payment increased your DTI by 19 percentage points. This could make it harder for you to qualify for any additional financing like a mortgage refinance, home equity loan, or auto loan while you have the solar loan.
Tips for Maintaining a Healthy DTI with a Solar Loan
If you want to keep your DTI at 36% or lower when financing solar panels, here are some tips:
-
Put at least 10% down on the system cost as a down payment. This lowers the amount you have to finance.
-
Shop around for the best loan terms. Look for low interest rates and flexible loan terms like 12-15 years. This keeps monthly payments lower.
-
Pay down existing debts before applying for the solar loan. The lower your current DTI, the less impact the new solar loan will have.
-
Opt for a smaller solar system if necessary. This lowers the overall system cost.
-
Increase your income with a side job or entrepreneurial venture. A higher gross monthly income means your DTI won’t go up as much.
-
Apply solar tax credits and incentives to the loan principal. This lowers the amount you have to finance.
The Impact on Home Buying and Refinancing
A higher DTI ratio can make it harder to qualify for a mortgage or refinance your home after going solar. This is because most conventional mortgages require a DTI of 43% or lower.
If your DTI exceeds 43% because of the solar loan payment, you may need to explore alternative options like FHA, USDA, or VA loans which allow higher DTIs. Or you may need to wait until you’ve paid down the solar loan balance before trying to refinance.
That said, some lenders may exclude your solar loan from the DTI calculation if you provide documentation showing the system is expected to lower your overall utility costs. This is more common with solar leases and power purchase agreements (PPAs) versus solar loans. But it’s still worth asking potential lenders about if you plan to buy or refinance in the near future.
Weighing the Long-Term Savings
While a solar loan can increase your DTI in the short term, you also have to consider the long-term energy savings. Most solar panel systems eliminate 50-100% of a household’s electric bill over the life of the system. So while you take on more debt initially, a large portion of your utility costs goes away.
You’ll need to run the numbers to see if the long-term savings outweigh the impact to your DTI. If the solar loan payment is less than your current monthly energy bill, the system should save you money overall while helping to shrink your carbon footprint. Just be aware of how it impacts your finances in the short term.
Other Solar Financing Options
If you want to avoid debt completely, there are other options besides a solar loan:
-
Solar leases – These allow you to lease the system from a solar company with zero down payment. You pay a fixed monthly fee that’s typically lower than your current utility bill. At the end of the lease, you can extend it, buy the system, or have it removed. Lease payments are not considered debt.
-
Solar PPAs – Here you pay a solar company for the power generated from panels they install and own. The rate is lower than your utility’s, and it’s not considered a debt obligation.
-
Cash purchase – If you can pay for a system outright, you avoid financing altogether. But this option is rare as most systems cost $10,000+.
Should You Let DTI Impact Your Solar Decision?
Going solar can be a smart financial move overall, but you do need to weigh how it impacts your finances in the near term. Crunching the numbers to see how a solar loan or lease affects your DTI ratio is important.
A low DTI helps open doors for future loans and mortgages. But it’s also wise to consider long-term savings and energy independence. If structured properly, solar financing can be a reasonable trade-off.
To determine if solar is right for you, get quotes from multiple installers and financing companies. Compare all your solar power options. And speak to a financial advisor about how to maintain a healthy DTI throughout the process. This ensures you make the most informed solar decision for your household.
Does A Solar Loan Affect Debt To Income Ratio?
A solar loan can affect a homeowner’s debt-to-income (DTI) ratio. DTI ratio is a metric lenders use to determine an individual’s ability to take on additional debt.
The ratio is calculated by dividing a person’s monthly debt payments by their gross monthly income.
The lower the DTI ratio, the more likely the person will be approved for additional credit.
When a homeowner takes out a solar loan, the loan payments become part of their monthly debt payments.
As a result, the homeowner’s DTI ratio may increase, potentially making it more difficult to qualify for additional credit.
However, the solar loan payments are manageable within the homeowner’s budget, and they continue to make on-time payments.
In that case, the loan can positively impact the homeowner’s credit score and financial stability.
It is important for homeowners to carefully consider their DTI ratio and financial situation before taking out a solar loan.
Homeowners should ensure they can comfortably manage their monthly loan payments without negatively impacting their overall financial health.
Additionally, shopping around for the best loan terms and interest rates can help homeowners minimize the impact on their DTI ratio while reaping the benefits of solar energy.
How Can I Get a Loan if My Debt-to-income Ratio is High?
If your debt-to-income (DTI) ratio is high, it may be easier to get approved for a loan.
However, there are a few strategies that you can use to increase your chances of getting approved:
- Pay down your debts: If your DTI ratio is high because of consumer debt, such as credit card balances, consider paying down those balances before applying for a loan.
- Increase your income: Increasing your income, even temporarily, can help improve your DTI ratio.
Consider taking on a part-time job, freelancing, or asking for a raise at your current job.
- Consider a secured loan: Secured loans such as a home equity loan or a secured personal loan may be easier to get approved for, even with a high DTI ratio, since they require collateral.
However, be aware that you risk losing the collateral if you cannot repay the loan.
- Find a co-signer: If you have a family member or friend with good credit and a low DTI ratio, they may be willing to co-sign on a loan with you.
This can help you get approved for the loan and may result in a lower interest rate.
- Shop around: Different lenders have different requirements and may be more willing to work with borrowers with high DTI ratios.
Shop around and compare rates and terms from multiple lenders to find the best loan option for your needs.
Dirty Secrets Of Solar Financing (Solar Loan)
FAQ
Do solar loans affect debt to income?
Is a solar loan considered a second mortgage?
Do solar loans affect credit score?
Are solar loans a good idea?
Solar loans are one way to install solar panels on your home. However, if you want to avoid debt, solar leases and power purchase agreements (PPAs) allow you to start generating solar power without owning any equipment or finding financing.
Does taking out a solar loan increase your debt to income ratio?
Yes, taking out a solar loan typically increases your debt to income ratio, as it contributes toward your monthly debt payments. For example, if you had $500 in debt payments and $1,500 in income before going solar, your DTI would be 33%. If you add $150 solar loan payment, your DTI would increase to 43% ($650/$1500).
What if I can’t pay cash for solar?
If you can’t pay cash for solar, there are solar loans to help you start saving. Solar loans are flexible because they typically require $0 down and offer loan terms between 8-20 years. This allows you to design a loan with a monthly payment that you are comfortable, and essentially choose your own electricity rate.
Are solar loans flexible?
Solar loans are flexible because they typically require $0 down and offer loan terms between 8-20 years. This allows you to design a loan with a monthly payment that you are comfortable, and essentially choose your own electricity rate. Team up with an Energy Advisor to get multiple solar quotes and find the right solar loan for you.