The Energy Efficient Mortgage

by Alden Smith

I recently posted an article on Energy Efficient Mortgages on the Mortgage Mentor blog, the blog of Loan.com.  Interviewed was Jason Sampson of Envirolending.com. Energy Efficient Mortgages (EEMs) are mortgages designed for prospective home buyers who want to purchase homes with specific energy efficiency improvements.  The loans take into consideration what the borrower will save by living in an energy efficient home and applies this to the loan amount.  This article focuses on EEMs and what their advantages are for borrowers.

The Energy Efficient Mortgage

The EEM is designed to address environmental concerns.  It applies to loans for homes that qualify under certain environmental guidelines.  The loan can apply to both existing homes and new builds.  The process for this type of loan is the same as for a more conventional loan.  The only exception to the loan process is that a Home Energy Rating System (HERS) report must be submitted for the existing home or new build.  The report will contain information on how energy efficient a new home is, and information on what will be done to make an existing home more energy efficient.  There are 3 basic types of EEMs:

1. Conventional energy efficient mortgage.
2. FHA energy efficient mortgage
3. VA energy efficient mortgage.
   

Let’s look at these three.  A conventional energy efficient mortgage is designed to increase the purchasing power of buying an energy efficient home.  These loans are often sold to Fannie Mae and Freddie Mac.  The lender is able to increase the borrower’s income by a dollar amount equal to the estimated energy savings.  Fannie Mae can also adjust the value of the home to reflect the value of the energy efficiency measures.

The FHA energy efficient loan allows lenders to add 100% of the costs to the loan for energy efficient improvements.  The costs of these improvements cannot be more than the greater of $4,000 or 5 percent of the home's value up to $8,000.  No additional down payment will be required.  The FHA EEM is also approved for manufactured homes.

The VA EEM is available to qualified military personnel, reservists and veterans for energy improvements when purchasing an existing home.  The VA EEM sets a cap on this loan to $3,000 - $6,000.

The Home Energy Rating System

The HERS report is designed to provide an evaluation of the home’s energy efficiency.  The report is generated by a trained energy rater.  The rater will look at such things as insulation, appliance efficiencies, window types, local climate, and utility rates to make their determination.  Here’s what the report contains:

1. Recommended energy upgrades.
2. Estimations of costs for upgrades.
3. Typical annual savings.
4.  The design life of upgrades.
5.  An improved rating score after upgrades are performed.
6. The estimated annual total energy costs before and after upgrade.
   

Homes are rated on a scale of 1 to 100; the higher the score, the greater the energy efficiency.  The cost of the report runs from $100 to $300.  This cost can be paid by the borrower, lender, seller, or a real estate agent.

Qualifying for an EEM brings to the table options for the borrower.  They can use these potential savings like extra cash, and add the cost of upgrades into the mortgage.  Or, they can use these savings to add to their income, thus allowing them to borrow more on a mortgage.  This advantage means that a borrower can show these savings as a larger amount of income.  This can be added to the monthly mortgage payment.  

Who Benefits From An EEM?

Getting an EEM means everyone benefits.  Let’s look at the advantages for buyer, seller and those doing the build-out.

Buyers:

1. Qualify for a larger loan
2. Save money due to living in an energy efficient home.
3. The resale value is increased.
   

Sellers:

1. Home sells quicker.
2. Home is more affordable to more buyers.
3. Draws more attention in a competitive market.
   

Remodelers/refinancers:

1. EEM benefits are gained without moving.
2. Make improvements that actually save money.
3. Increases the resale value of the home.
   

It is easy to see that being friendly to the environment also puts money into your pocket.  Many of these loans are federally guaranteed, making them much more inviting.  Additional information on EEMs can be obtained from Fannie Mae and related websites.  If you are planning on moving, consider an EEM.   

Alden Smith is an award winning author and regular contributor to DoItYourself.com. He writes on a variety of subjects, and excels in research.