Why You Want a Lender Who Cares (about DTI)

Your business is built on your reputation. In order to protect that reputation, it’s important that you can rely on your finance partner to evaluate whether a solar loan is the right fit for your customer.

Assessing a borrower’s ability to repay is the cornerstone of any responsible consumer lending program. Debt-to-income (DTI) is the standard metric used to ensure that prospective borrowers have adequate cash flow to meet a new debt obligation. As the industry matures, the solar financing industry is increasingly incorporating this key metric.

How is a debt-to-income ratio calculated and what does it measure?

Here is the basic concept: Add up all the monthly inflows of cash. Typical elements of household income include W-2 salary or income derived from being self-employed, rental income, social security and pensions. Separately, add up all the existing monthly obligations of a borrower. Typical monthly obligations or debts include mortgage payments, auto loans, student loans and credit cards. The debt-to-income ratio is simply the number that relates debt (in the numerator) to income (in the denominator).

You’ll notice that what is not included in the calculation is general living expenses such as food, taxes, entertainment, gasoline, insurance premiums and cell phone bills. In other words, a borrower with a 100% DTI has no funds remaining to cover general living expenses after they have met their existing monthly obligations.

A healthy debt-to-income ratio is below 25%. Debt-to-income ratios between 25% to 45% are considered borderline. Debt-to-income ratios over 45% may be considered a red flag depending on the context such as the absolute level of income.

Why do responsible solar lenders assess DTI when solar saves homeowners money?

Here’s why: Solar is a great value proposition for many people. That doesn’t mean that solar saves people money every month.

Seasonal variation in load and production

In cold climates, heating bills may soar and the solar arrays may be snow-covered. On the other end of the spectrum, heat waves may send the cost of cooling homes through the roof while solar production may be diminished. In both of these cases, solar savings may be lower than typical. And yet a standard solar loan payment is still due.

Looking at your customer’s debt-to-income ratio allows us to feel confident that your customer will be able to make a regular monthly loan payments despite the natural ebb and flow of solar savings.

We understand that selling solar requires us all to keep it simple. Oftentimes this means talking about saving a certain $ amount per month. That’s OK, but it’s our job to make sure that we understand and plan for the various scenarios that your customers will regularly experience when they go solar. Seasonal change is just one of the many scenarios that can affect the monthly math for your customers.

Beware of “fast food” solar loans

For solar veterans, assessing a homeowner’s DTI ratio may be an unexpected addition to the financing process; after all, solar lease/PPA providers typically relied on FICO score and did not evaluate DTI. Relying on FICO scores makes sense in the case of third-party ownership.

With PACE financing, the industry learned a hard lesson when state legislators introduced new requirements on financiers. Initially PACE providers neglected to evaluate whether borrowers actually had the ability to repay their PACE assessments. The results have been negative press for the industry, discontinuation of PACE programs in counties across California as complaints mounted, and an unfortunate boom and bust cycle for contractors reliant on the financing option.

In other words, fast food solar loans may taste good now but are not healthy for growing a sustainable business.