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If you were shopping for a home and found one that was well-built, comfortable, had lower-than-average monthly energy costs, and required no additional income to pay for it, would you stop shopping? Although most prospective homebuyers would jump at such a chance, the tool that can make such a purchase possible–the energy mortgage–is still unfamiliar to many homebuyers and even to many real estate agents.
An energy mortgage increases a consumer’s buying power by enabling mortgage lenders to count the monthly energy bill savings that a home’s energy efficiency features deliver as additional income. There are two kinds of energy mortgages: energy-efficient mortgages and energy improvement mortgages.
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The energy-efficient mortgage credits the savings from a home that is already efficient into the loan qualification process and capitalizes the improved features into the appraisal. An energy improvement mortgage increases the buying power of a consumer by financing energy improvements that are shown to be cost-effective and capitalizing the ensuing monthly savings into the mortgage loan. All of the national secondary mortgage markets--conventional as well as federally insured programs--offer energy mortgage products.
Both types of energy mortgage programs rely upon a home energy rating to calculate the savings generated from a home efficiency features. Home energy ratings involve an inspection of a property’s energy features–its insulation, windows, condition of heater/domestic hot water heater, for example--by a specially trained residential energy efficiency professional, known as a home energy rater. (To find a rater that is certified by a home energy rating organization accredited by the Residential Energy Services Network (RESNET), visit RESNET’s national directory of accredited home energy rating organizations at www.natresnet.org/accred/registry.htm.)
When a prospective homebuyer has an energy rating performed on the home he or she is planning on buying, the energy rater inspects the house and then feeds information on the home’s energy features into a rating software program. The computer program then projects the home’s energy consumption, monthly utility costs, and gives a uniform score of one to one hundred based on the home’s relative energy efficiency. The computer program also recommends cost-effective measures the homebuyer can undertake, their projected cost to install, their estimated energy savings, and an economic analysis. Based on the inspection and computer analysis, the energy rater recommends cost-effective improvements and projects the installed costs and the monthly projected savings. The consumer decides what improvements he or she wants done and identifies a contractor to install them. The prospective homeowner then takes this plan to the lender.
The lender underwrites the mortgage, including the upgrades, uses the home energy rating as documentation, and sets up an escrow for the improvements. The contractor makes the improvements. The rater returns to confirm that the installation was completed. The lender then releases the escrow and the contractor gets paid. The consumer gets to immediately enjoy a more comfortable home that has lower utility bills. All this is accomplished without any additional income qualification or higher down payment. There is also no additional risk to the lender nor delay in the closing of the loan.
Each of the secondary mortgage markets offer energy mortgages. The following is a summary of each of the programs. An example of how they work is also included.
Veterans Administration Energy Mortgage Program
Eligibility
Home purchase and refinancing
Amount of Energy Improvements that can be Financed
100% of the energy improvements subject to the following limits:
1. Up to $3,000 based solely on documented installation costs
2. Over $3,000 and up to $6,000 provided the home energy rating projects the reduction in monthly energy savings exceed the increase in the monthly mortgage payment.
Down Payment
No additional down payment on the cost of the energy improvements if the rating projects that they create a positive cash flow.
Loan Limits
The total loan after adding the energy improvements being financed can not exceed the VA loan limit.
Loan to Value Limitations
The final Loan to Value (LTV) may exceed 100% appraised value if the rating shows that the energy improvements have a positive cash flow.
Eligible Energy Improvements that can be Financed
All improvements identified by the energy rating as having combined cost-effectiveness.
Installation Time Limit
180 days
Sample of How VA Energy Mortgage Works
- Appraised Value of Home Being Purchased: $120,000
- Interest Rate: 8.5%
- Term of Loan 30 years
- Cost of Energy Improvements: $3,400
- Projected Monthly Energy Savings from Rating: $32.50
- Monthly Mortgage Payment Increase: $26.14
- Loan is approved since the monthly energy savings from the rating ($32.50) exceeds the added monthly mortgage payment (principal and interest) of $26.14.
FHA Energy Mortgage Program
Eligibility
Purchase and refinance of 1 — 2 unit owner occupied homes.
Energy Improvement Financing
$4,000 or 5% of the appraised value (whichever is greater) up to a maximum of $8,000.
Loan Limits
FHA maximum loan limits can be exceeded by the energy improvements being financed.
Loan to Value
The final LTV may exceed 100% of the appraised value when the energy improvements are shown through an energy rating as having a combined present value then the cost of upgrades.
Eligible Energy Improvements that can be Financed
All energy improvements identified by the energy rating as having a combined present value greater than the costs of the upgrades.
Installation Time Limits
90 days.
Documentation Required of Lender
Home energy rating, Contractor bids, HUD B Worksheet.
Example of FHA Energy Mortgage
- Home Sales Price: $60,000
- Interest Rate: 8.0%
- Closing Costs: $1,200
- Cost of Energy Improvements: $3,000
- Average Life of Measures Calculated by Rating: 10 years
- Monthly Energy Savings Calculated by Rating: $40
Standard Underwriting
$60,000 Sales Price
$60,000 Appraised Value
+ $1,200 Closing Costs
97.75% LTV
$58,640 Loan Limit
Energy Improvement Mortgage Calculation
$58,640 Loan Amount
$3,000 Cost of Energy Improvements
10 years Average Life of Measures
$480 Annual Energy Savings
$3,220 Energy Premium (taken from FHA present value calculation completed by rating)
New Loan Amount
$58,640 Standard Loan Calculation
$ 3,000 Energy Improvement Mortgage
$61,640 New Loan Amount (No additional down payment nor additional income required to qualify for new amount)
Freddie Mac Energy Mortgage
Eligibility
Purchase and refinance of 1 to 4 owner occupied units.
Amount of Energy Improvements that can be Financed
No limit if supported by value.
Down Payment
Requires down payment related to the LTV of the loan including energy improvements.
Increased Loan Qualification
Principal, Interest, Insurance and Taxes (PITI) loan qualification increases dollar-for-dollar to reflect energy savings projected from energy rating.
Appraised Value
Energy improvements added to market value determined by appraiser through an energy rating from a RESNET accredited home energy rating provider.
Loan to Value
Loan amount including energy upgrades cannot exceed 95% LTV.
Eligible Energy Improvements
All improvements recommended by energy rating as being cost-effective.
Energy Improvements Installation Time Limits
Up to 120 days after mortgage closes.
Documentation Required of Lender
Home energy rating.
Example of Freddie Mac Energy Mortgage
- Interest Rate: 8.0%
- Borrower’s Monthly Income: $2,900
- Cost of Energy Improvements: $3,300
- Projected Monthly Energy Savings from Rating: $75
- Home Purchase Price $100,000 - $103,300
- Down Payment $10,000 - $10,307
- Mortgage Qualified For $90,000 - $100,200
- Monthly PI Qualified For $660.39 - $735.39
- Taxes & Insurance $139.61 - $139.61
- PITI $800.00 - $875.00
- Less Monthly Energy Savings $ -0- $75.00
- Adjusted LTV 90% - 97%
- Consumer Buying Power $90,000 - $100,221
This example demonstrates that with the same income, the consumer can afford an additional $10,200 in more of a home while capturing $75 a month in energy savings.
Fannie Mae Energy Mortgage
Eligibility
The purchase and refinance of 1 to 4 owner occupied units. Applies to all Fannie Mae products.
Amount of Energy Improvements that can be Financed
Up to 15% of the home’s appraised value. 100% of the energy improvements recommended by a rating to be cost effective can be financed.
Down Payment
No additional down payment is required for the energy improvements being financed.
Increased Loan Qualification
Dollar-for-dollar estimated energy savings from the energy rating is added to the maximum allowable Principal, Interest, Insurance and Taxes (PITI) monthly payment.
Appraised Value
Energy improvements added to market value determined by appraiser through an energy rating from a RESNET accredited home energy rating provider.
Loan to Value
The value of the energy efficiency measures is added to the LTV calculation.
Eligible Energy Improvements
All improvement recommended by the energy rating as being cost-effective.
Energy Improvements Installation Time Limits
Up to six months after mortgage closes.
Documentation Required of Lender
Home energy rating and Fannie Mae Form 1224, "Energy Efficient Mortgage Underwriting Adjustment Report".
Example of Fannie Mae Energy Mortgage
- Purchase Price: $100,000
- Cost of Energy Improvements: $3,000
- Projected Monthly Energy Savings from Rating: $50
Conventional Energy Mortgage Mortgage
- Appraised Value $100,000 - $103,000
- Down Payment $10,000
- Mortgage Qualified For $90,000 - $93,000
- Monthly P&I $614 - $634
- Monthly Energy Savings -0- ($50)
- Monthly Housing Cost $614* - $584
* Not including monthly energy costs
This example demonstrates that with the same income, the consumer can afford an additional $3,000 in more of a home while capturing $50 a month in energy savings.
RESNET has posted the actual underwriting guidelines for each of these programs on its Web site at www.natresnet.org/lenders/.
Another category of mortgages are "jumbo loans". These loans exceed the dollar value that has been set for Fannie Mae, Freddie Mac, FHA, and VA. These loans are either held by the mortgage company or sold on Wall Street as mortgage-backed securities. Since none of these loans go through a federally backed secondary mortgage market they are not bound by any of the other programs guidelines. This does not mean that it is not possible to finance energy efficient improvements through one of these mortgages. It does mean, however, that the consumer will have to present the case that energy efficiency in a home does not make a mortgage any riskier, as in the case described below.
Assume that you are purchasing a home for $325,000 and that it could use $15,000 in energy improvements (roof insulation, new efficient heating system, air sealing, and new efficient water heater). The projected monthly energy savings is $120. The added monthly principal and interest payments would be $107. The argument would be that the added investment for the improvements is offset by $13 a month in energy savings. This is a better rate of return than investing the $15,000 in a mutual fund.
If you are not planning to purchase or refinance a home, there are still ways to finance energy efficiency improvements. Fannie Mae offers a direct, non-recourse consumer loan program that will finance up to $20,000 in energy improvements without putting a lien on your home. To find a participating partner that is offering the program in your community, e-mail David Carey at david_s_carey@fannie.com.
Author: Steve Baden is executive director of Residential Energy Services Network.
Reprinted by permission of Home Energy magazine. Copyright 2009.
(Note: The views expressed in this article are those of the author, and do not necessarily represent those of The Healthy House Institute, LLC.)
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