Financing of residential solar energy projects can help cover the upfront cost of a solar system, enabling greater deployment of solar power. About 85% of residential solar photovoltaic (PV) systems in the U.S. are financed. The U.S. Department of Energy (DOE) Solar Energy Technologies Office (SETO) has developed this guide to answer some common questions that finance professionals may have about residential solar financing and provide resources to aid learning and develop best practices in this space.

Why You Should Offer Residential Solar Financing

In 2021, the U.S. installed approximately $15 billion in residential solar energy generation assets, the vast majority of which received equity or debt financing. While the cost of solar PV systems is expected to continue to go down, capital expenditures should increase significantly over the next decade as deployment rapidly increases.

Financing the purchase of a solar energy system allows households to pay for their system over time, better lining up the long-term bill savings with the cost of the system instead of requiring them to pay up front. Households without sufficiently large tax liability can also take full advantage of PV tax incentives through third-party ownership (TPO) financing. Households that finance their solar PV systems through a TPO arrangement can also reduce their exposure to financial risks related to PV underperformance, unanticipated operations and maintenance costs, and delays in receiving incentives and grid interconnection approval.

Getting Started

Residential solar loans allow homeowners to borrow money from financial institutions or solar developers to install rooftop solar panels. A variety of loan offerings are available with different monthly payment amounts, interest rates, lengths, credit requirements, and security mechanisms.

With a loan, homeowners own the installed solar system and start saving money on their electricity bills right away. The reduction in their energy bill corresponds to the energy their system produces. They can work with finance professionals to structure their loan so that the monthly payments are lower than their electricity bill savings, resulting in net savings.

Residential Property Assessed Clean Energy (R-PACE) is another loan product often used to finance residential energy upgrades and is available in certain parts of the country. Instead of loan payments to a bank, homeowners pay for the upgrades over a fixed number of years through an assessment on their property tax bill. An R-PACE assessment also differs from a typical loan in that it is attached to the property rather than to the homeowner. This can make it easier for homeowners to purchase a solar system even if they sell their home before the system is fully paid off, as the system would convey with the home upon sale and the new owner would be responsible for the property’s tax bill (including the assessment of the solar asset).

Leases and power purchase agreements (PPAs) are common solar financing options offered by TPO providers. Third-party providers reduce the homeowners’ exposure to financial risks from underperformance of PV systems, unanticipated operations and maintenance costs, and delays in receiving incentives and grid interconnection approval. They also form financing arrangements to monetize the federal and state tax benefits of a project, which can be too large to absorb for many households. However, having a solar asset on one’s home owned by another company can make it more complicated for a customer to sell their home.

Under a solar lease, homeowners sign a service contract and make fixed payments to a solar leasing company that installs and owns the solar system on the homeowner’s property. There are often clauses in the contract to compensate homeowners if the system produces significantly less electricity than expected.

Under a solar PPA, homeowners pay for the energy that is generated by the system. A solar TPO buys, installs, and maintains a solar system on a homeowner’s property, and the customer purchases the energy generated by the system on a per-kilowatt-hour basis through a long-term contract. This allows the customer to use solar energy at a fixed rate while avoiding the upfront cost of the solar system and operations and maintenance responsibilities.

Under both leases and PPAs, the homeowners’ payments and associated electricity bill savings are determined by the size of the solar system, how much of the electricity it generates is exported to the electric grid, and what the net metering policy is in that area. The addition of a storage battery to the PV system adds to the cost of installation but can provide secure backup power in the event of a power outage and insulate the homeowner from future changes to net metering policy.

In the event the homeowner would like to sell their home, they typically have a few options depending on the terms of the contract. The solar lease can be transferred to the new homeowner if both parties agree to it and file the appropriate paperwork after the sale. The homeowner can also buy out the lease and have the system removed, which can include an early termination fee, or purchase the PV system from the provider. Residential solar providers claim a 98% success rate in transferring the lease to the new homeowner in the event of a sale.

For more details, check out the Clean Energy States Alliance’s Homeowner’s Guide to Solar Financing.

In a 2022 report on Long-Term Performance of Energy Efficiency Loan Portfolios, Lawrence Berkeley National Laboratory analyzed more than 50,000 residential solar loans across four states. The report found that the delinquency and loss rates of these loans were low compared with unsecured consumer loans and are comparable to the rates for prime auto loans, which are secured by the vehicles. Like other consumer loans, losses are highest early in loan lifetimes and decline later. The delinquency rates are 1.57% at 30 days, 0.62% at 60 days, and 0.21% at 90 days.

The strong performance of residential solar loans may be supported by utility bill savings or may reflect differences in borrower and loan characteristics between these loans and other loan types.

Some residential solar loans need to be secured through an asset that serves as collateral. These loans are typically secured by real estate or the solar equipment itself, but solar systems are also often purchased through an unsecured personal loan, based on the credit quality, income, and debt level of individuals.

Securing a solar loan through the underlying real estate typically goes through either a home equity loan (also referred to as a second mortgage), a home energy line of credit (HELOC), or is rolled into the first mortgage during a refinancing. Real estate loans typically offer lower rates than other types of loans and carry longer repayment terms, which allows solar system owners to better match the loan payments with their energy cost savings. Obtaining a real estate loan requires time and money, which is why personal loans have historically been more popular for solar installations. Like other real estate loans, they require a closing, or settlement, at which all parties sign the loan documents. The real estate is appraised to ensure the owner has enough equity in the property, the loan is registered with the county clerk, and taxes are evaluated.  

Instead of securing a loan through real estate, many solar loan providers secure the loan through the solar system equipment through a Uniform Commercial Code (UCC-1) filing. This gives notice to the county or state of the lender’s lien (also known as a security interest) on the solar equipment, but not on the underlying real estate. UCC-1 filings require less upfront time, money, and paperwork compared with real estate loan processes. The UCC-1 filing also gives the lender certain rights, such as repossession of the system until the loan is repaid. However, solar lenders may have difficulty recouping the value of the system if it is repossessed, and they must re-register the UCC-1 filing periodically.

With an unsecured loan, lenders hold no collateral and instead make loans based on an individual’s credit score, income, and debt level. Such loans can save time and effort to set up compared to other loans, but typically the interest rate is higher and the loan term is shorter than with a secured loan. In addition, only borrowers with good credit, high income, and limited outstanding debt can qualify for unsecured loans.

While the cost of solar PV has declined significantly over the last decade, a solar system is still a substantial investment. To encourage solar energy deployment, federal, state, and local governments, and even some utilities, offer incentives to help make solar energy more affordable and accessible. These incentives typically take the form of rebates, tax benefits, or performance-based incentives, and can reduce the cost of a solar system 30% or more. The federal government offers the Investment Tax Credit (ITC) to allow homeowners to deduct a portion of the cost of a solar system from their income taxes. The ITC cuts the cost of a solar system by 30%, which is more than $7,500 for an average system. Our Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics has more information on the ITC, including eligibility requirements. Congress has recently expanded the ITC to include battery storage technologies.

Some state and local governments offer solar loans for their residents. You can check out what loan programs and other incentives, such as cash back rebates, are available in your area by visiting the Database of State Incentives for Renewables and Efficiency (DSIRE) website.

Evaluating Risk and Creditworthiness

By only using credit scores to evaluate risk, you can miss out on valuable potential customers. A low credit score, while indicative of past financial health, doesn’t fully represent a borrower’s current ability to pay back a loan, just like a high credit score doesn’t ward against a host of factors that could limit a person’s ability to repay. There are many other indicators, such as an individual’s history of on-time loan payments or utility bill payments, that financial institutions can use to assess default risk for solar loans.

Alternative approaches use a larger sample of data about the borrower’s financial health, like cell phone bills, utilities, rent payments, and checking account patterns to give a more accurate picture of how creditworthy an individual may be.

For example, the Solar for All program, run by the Connecticut Green Bank and PosiGen from 2015 to 2021, used households’ utility bill payment history to demonstrate their creditworthiness and facilitated more than 3,000 residential solar installations for low- to moderate-income (LMI) households. In the community solar space, the Solstice Initiative, in partnership with researchers at Massachusetts Institute of Technology and Stanford University, developed EnergyScore, a more inclusive and accurate predictor of utility bill payment performance than a traditional credit score. This metric allowed Solstice to offer community solar subscriptions to qualified low- or no-credit households while decreasing overall project risk.

Data from the Lawrence Berkeley National Laboratory shows that borrowers from low-income areas who have strong credit and pass household-level debt-to-income screens are likely to repay loans or other extended financing at a strong rate.

Partnering with solar installers that have experience working with low-income households has been shown to increase equity in customer acquisition, likely due to specific, targeted marketing skills and strategies to reach these audiences. Leases have also been more effective in increasing equity in low-income household solar adoption compared to loans.

Evaluating Technical Information for Solar Projects

Solar installers will evaluate the technical potential of a solar project for your borrowers by considering factors like how their roof is tilted, which direction it faces, how much shade it gets, and local weather patterns. Generally, a solar system should only be large enough to supply the amount of electricity the customer uses each year. Some customers may prefer a larger system in anticipation of higher electricity use in the future from things like electric vehicles or electrification of other aspects of their house, such as heating systems. The installer should look at the homeowner’s annual electricity usage and estimate bill savings as well. Read more about solar contracts in Understanding Your Rooftop Solar Energy Contract.

When reviewing a project, it is important to review the solar installation company’s project portfolio to see if they have experience with similar projects. It is also useful to determine whether the project is turnkey and includes design, modeling, engineering, permits, installation, roofer coordination on warranty, code-required safety equipment, interconnection and associated applications, procurement, taxes, and quality assurance.

Training and Information

The Center for Impact Finance at the University of New Hampshire’s Carsey School of Public Policy and the Inclusiv Center for Resiliency and Clean Energy have developed a virtual Solar Lending Professional Training and Certificate Program. The program covers the knowledge, skills, and practices you need to do solar lending, including market assessment, product development, working with solar installers and developers, working with underserved borrowers, underwriting and deal structuring, and program and asset management. The training has tracks for both consumer and commercial solar financing.

In addition, some states or regions have dedicated government or nonprofit staff to help you understand the factors to consider when vetting solar installers to work with.

SETO administers several programs that advance solar finance research. You can learn more about these on our solar energy cost and data analysis and innovative and equitable solar financing and philanthropy research pages.

The Center for Impact Finance at the University of New Hampshire’s Carsey School of Public Policy, with support from SETO, conducts research on how to use solar finance as a tool to support economic development, community resiliency, and energy affordability.  You can read their latest findings in their Scaling Equitable Solar Financing paper.

Lawrence Berkeley National Laboratory’s Electricity Markets and Policy department provides independent, interdisciplinary analysis of energy efficiency financing.

Low-Income Financing Considerations

For low- and moderate-income (LMI) households, the financial benefits of solar power can make a big difference. Many lower-income households carry a large energy burden, meaning that their energy and utility bills consume a larger share of their income compared to the average household. Across the U.S., low-income households spend about three times more of their income on energy costs than other households. Solar power can reduce those energy burdens by providing on-site power at a lower cost than grid electricity.

Even if low-income consumers own their home and have a roof suitable for solar panels, they may not qualify for federal tax incentives, lack adequate credit to qualify for a loan, or the mission-driven lenders seeking to serve them may not have enough capital to make long-term loans. Innovative and equitable solar financing can open new participation pathways for those who have been historically excluded from the solar energy market.

About 43% of U.S. households are considered LMI, according to a recent NREL report. To decarbonize the energy sector, DOE expects that annual residential solar installations will need to grow six to seven times their current level. This high level of deployment will be very difficult to reach without LMI solar adoption.

Lawrence Berkeley National Laboratory found that financial incentives such as rebates and net metering drove solar adoption among LMI households where this adoption would not have otherwise occurred. This incentive-based adoption showed a spillover effect, where neighboring LMI households were more likely to adopt solar even if they did not receive the incentives themselves.

Households that don’t qualify for solar loans may be able to go solar through community solar. Through this model, households can either buy or lease a portion of the solar panels in an off-site system and receive an electric bill credit for electricity generated by their share of the system. Community solar subscriptions can be a great option for people who are unable to install solar panels on their roofs because they don’t own their homes, have insufficient roof conditions to support a rooftop PV system due to shading, roof size, or other factors, or for financial or other reasons.

To learn more about financing for community solar, explore the DOE Community Power AcceleratorTM.

Additional Resources

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See more solar energy resources for professionals. If you’re new to solar and want to understand more, learn how solar works.