An Energy Mortgage includes Energy Efficient Mortgages (EEMs) and and Energy
Improvement Mortgages (EIMs) and can be used at time of sale or refinance in
one of two ways: 1) An EEM can be used to qualify for a larger mortgage loan
if the home to be purchased or refinanced is energy efficient, and 2) an EIM
can be used to finance energy improvements in the mortgage of an existing home
and pay for the improvements over the life of the loan.
The EEM takes into account the lower energy costs of an energy efficient home.
Lower utility bills mean more disposable income, which means a buyer of an energy
efficient home can afford a larger house payment and therefore qualify for larger
mortgage loan or the increased monthly mortgage payment that results from adding
the cost of improvements to the mortgage amount.
When calculating the maximum loan amount for which a buyer can qualify, lenders
look at the housing expenses (called PITI for: principle, interest, taxes and
insurance) and the overall monthly debt-load (including things like credit cards,
car payments, etc.). Both PITI and the total debt-load are then compared to
the applicant's monthly family income.
For conventional loans, lenders typically allow a maximum debt-to-income "qualifying
ratio" of 28% (for PITI) and 36% (for overall debt-load). For FHA insured
loans, the ratios can be slightly higher: 29% and 41%. However, if the house
rates "energy efficient," the ratios can be expanded by 2% in addition
to all other compensating factors.
Expanded qualifying ratios means more buying power for consumers. Exactly how
much more depends on income and interest rates. For a mortgage loan at 9% interest
for example, a family with an income of $20,000 could qualify for $4,143 more
than would be allowed under normal underwriting procedures. A family with an
income of $60,000 could qualify for a mortgage of $12,428 more.
Not all lenders are familiar with EEMs. Click here for EEM lenders near you.
EIMs for existing homes allow energy improvements to be made on the front end
and paid off over the life of the loan. To distinguish these from EEMs for new
houses which allow larger loans through expanded qualifying ratio stretches,
EIMs to add improvements to an existing house are referred to as "energy
improvement mortgages."
Energy improvement mortgages can be used at time of refinance or time of sale.
While procedures are different for FHA, VA and conventional loans, a common
requirement of an EIM is that the improvements package must be shown to be "cost-effective."
This means the expected monthly dollar savings from energy improvements must
exceed the additional mortgage payment needed to finance them. For VA guaranteed
loans, this simply means the monthly utility cost savings must exceed the added
mortgage payment for financing the improvements. For FHA and conventional loans,
a "present-value" of the improvements must be calculated and the present
value must exceed the additional monthly payment.
You can now view Fannie Mae's forms on-line. With a click of a mouse, you can download 85 forms that are used in the orgination, selling, and servicing of all Fannie Mae's owned or securitized mortgages. Fannie Mae's web site can be accessed at http://www.fanniemae.com.
New Fannie Mae and Freddie Mac EEM programs differs from previous EEM programs in several ways. First, in addition to allowing mortgage qualifying ratios to be expanded two points for new homes that rate FOUR STAR, it also allows expanded ratios for existing homes that rate THREE STAR PLUS.
The pilot program further allows appraisers to increase the appraised market
value of the home by the lower amount of a) the cost of energy improvement measures,
or b) the present value of energy savings. This reduces an historical barrier
to EEMs where appraisers have been unable to give dollar for dollar value for
improvements in the appraisal, forcing buyers at closing to come up with the
difference in the cost of improvements and what they were valued in the appraisal.
For improvements of existing homes, the energy savings must be at least 25%.
For new homes, the energy savings have to meet a minimum threshold of 25% above
the state energy code or standard building practice. For a ratio stretch in
Colorado, FHA has simply adopted a score of 70 points on the 100-point rating
scale.
The Department's Federal Housing Administration (usually referred to as "FHA")
administers a variety of single family mortgage insurance programs designed
to make homeownership more readily available. Two insurance programs that are
related to energy efficiency and are currently active are listed below. These
programs operate through HUD-approved lending institutions such as banks, savings
and loan associations, and mortgage companies. These lenders fund the mortgage
which HUD insures. HUD does not provide direct loans or financial assistance
to purchase a house. FHA's site can ve accessed at http://www.hud.gov.fha.fhahome.html
Energy Efficient Mortgage
Eligibility Requirements for FHA-insured loans are as follows:
Borrower is eligible for approximately 97% financing. Borrower is able to finance
closing
costs and the upfront mortgage insurance premium into the mortgage. The borrower
will
also be responsible for paying an annual premium.
Eligible properties are one-to-two unit existing and new construction.
The cost of the energy efficient improvements that may be eligible for financing
into the
mortgage is the greater of 5% percent of the property's value (not to exceed
$8,000) or
$4,000.
To be eligible for inclusion in the mortgage, the energy efficient improvements
must be
cost effective, meaning that the total cost of the improvements is less than
the total present
value of the energy saved over the useful life of the energy improvement.
The cost of the energy improvements and estimate of the energy savings must
be
determined by a home energy rating system (HERS) or energy consultant. Up to
$200 of
the cost of the energy inspection report may be included in the mortgage.
Maximum mortgage amount for a single family unit is $155,250 plus the cost of
the
eligible energy efficient improvements. Lesser limits may be applicable in other
areas.
HUD Section 203(k) loan
A number of home buyers are combining the EEM program with a Section 203(k)
loan. This program provides mortgage insurance for a person to purchase or refinance
a principal residence or
investment property and to accomplish rehabilitation and/or improvement of an
existing
one-to-four unit dwelling.
Eligibility Requirements:
Borrower must meet standard FHA credit qualifications.
Borrower may be an owner-occupant or an investor.
Mortgage insurance premium is paid monthly. There is no upfront mortgage insurance
premium.
Borrower can purchase a one-to-four unit property that was completed for at
least one year.
The number of units on the site must be acceptable according to the provisions
of local
zoning requirements.
Homes that have been demolished, or will be razed as part of the rehabilitation
work, are
eligible provided the existing foundation system is not affected and will still
be used. The
complete foundation system must remain in place.
Mortgage limits are the same as for Section 203(b).
For More Information, contact the Director of Single Family Programs in your Local HUD Office.
For an energy improvement mortgage at time of sale or refinance, the steps
are as follows: First, the borrower informs the lender at time of loan application
or soon afterwards of their desire to include the cost of energy improvements
in the mortgage. Next, the house is inspected by an Energy
rater. An Energy Rating Report is generated which includes an "as is"
energy rating and recommendations for improvements. Bids are obtained and a
package of cost-effective improvements are determined. The loan closes. The
lender escrow's the cost of the improvements. The work is completed within 30
to 120 days after closing. A final inspection is performed to ensure the improvements
are installed as specified. The escrow is released and the contractors are paid.
After closing the loan, the lender can ship the loan with the outstanding energy
escrow to Fannie Mae or Freddie Mac. For lenders that sell to an intermediate
buyer, the lender usually waits until the improvements are completed before
shipping the loan.
A list of participating EEM lenders is
available for some parts of the country.
The Alliance to Save Energy has published "Energy Efficiency Financing: A Lender's Guide for Taking Advantage of This Emerging Market." This guide provides valuable information to lenders, from defining what energy efficiency financing is, to listing the various financing products available from Fannie Mae, Freddie Mac, FHA, VA, and others. In addition, the guide describes the many benefits of energy efficiency lending, how to get started, and the relevant underwriting guidelines. A listing of contacts and a complete glossary of terms are included, making this publication a "must-have" for any lender offering home financing or home improvement loans. June 1996. 32 pages. $15. To order, call (202) 857-0666. For other Alliance publications. click here.
Many consumers rely on EEM service companies to take care of the details of
an EEM and ensure that the process flows smoothly. Often called EEM facilitators,
these one-stop-shops are well versed in the programs and take care of: ordering
the rating, working with the buyer, the lender and the Realtor, putting together
the improvement package, scheduling the work, ensuring the work is done correctly,
arranging for the final inspection and paying sub-contractors when the escrow
is released.
There are not many of these businesses around yet, but with national expansion
of EEM programs, this is a growth industry. Check, because there may be an EEM
facilitator in your area.
To allow expanding qualifying ratios, a home must be determined to be "energy efficient." For purpose of an EEM, a home is considered "energy efficient" if it equals or exceeds the standards of the Council of American Building Officials' (CABO) Model Energy Code (MEC). There are three methods of documenting a home as "efficient":
The Model Energy Code was created by the Council of American Building Officials
(CABO) as a model for local codes. Jurisdictions adopt the MEC as they revise
and update their codes. Codes are written with hard to understand (even for
code people) engineering algorithms and calculating compliance manually can
be tedious. Fortunately, software alternatives are available.
One alternative is REScheck, developed by the U.S. Department of Energy's Building
Standards and Guidelines Program along with Pacific Northwest National Laboratory
(PNL). To order REScheck materials over the telephone call the REScheck hotline
at 1-800-270-2633.
To find out more about MEC and downloading software on line, click download REScheck.
A preferable alternative may be to have Model Energy Code compliance determined
as part of a home energy rating report. In addition
to compliance, this will also include estimated annual energy costs and improvement
recommendations. See ordering an energy rating.
Home energy rating systems provide a way to evaluate and compare the energy
efficiency of houses when shopping for a home or considering energy improvements.
Much like "miles-per-gallon" ratings for automobiles or Energy Guide
labels for appliances, an energy rating provides consumers with information
to make a better informed decision.
An energy rating begins with a trained energy rater providing an on-site inspection.
The inspection includes evaluating insulation levels and air-tightness of the
ceiling walls and floor, windows, doors, water heater, heating and cooling equipment
efficiency. Based on the collected data, HERS software is used to estimate annual
energy usage and costs and generate an energy rating of one to five stars on
a 100-point scale. A rating report is produced which includes a list of energy
improvement options prioritized by cost and savings.
Over the past ten years, home energy rating systems for both new and existing
houses have been developed in more than a dozen states by state agencies working
with builders, appraisers, lenders, Realtors, contractors and utilities.
A HERS Council was established in 1993 and funded by the U.S. Department of
Energy to draft voluntary guidelines for HERS programs in an effort to bring
consistency to a variety of programs. For an update on the Guidelines and pending
issues out for review and comment, click HERS Guidelines. A hard copy of the Guidelines can be ordered
from the HERS Council, 1511 "K' Street NW, Suite 600, Washington, DC 20005,
or by calling (202) 638-3700. The cost is $15.
The Residential Energy Services Network (RESNET)
is a joint project of Energy Rated Homes of America and the National Association
of State Energy Officials. RESNET is an association of state energy offices,
ratings systems, weatherization agencies and others. RESNET NOTES, a monthly
bulletin prepared by Steve Baden in Alaska, tracks the current expansion of
HERS programs and news of HERS- and EEM-related activities. You can view RESNET
NOTES or RESNET''S Home Energy Ratings: A Primer at RESNET.
Interest in residential energy efficiency, home energy ratings, and energy mortgages is on the rise as witnessed in the growth of RESNET's network. At the beginningh of 1997, the network included 102 mortgage lending companies, 21 state and local home builder associations, 57 home builder firms, 35 real estate companies, 13 appraisal firms, 27 residential designers, 24 home inspection companies, 17 state housing finance agencies, 22 state-wide home energy rating systems, 50 state energy offices, 96 electric and gas utilities, 28 state weatherization agencies, 191 community action agencies, 42 building science organizations, 44 energy/environmental organizations, 10 affordable housing organizations, 161 energy consultants/manufacturers, and 70 home energy rating companies. Subscribers to the RESNET network are kept up-to-date on developments effecting residential energy financing through RESNET NOTES, a web site on the Internet, an annual RESNET conference and technical assistance.
To find out if there is a home energy rating system in your area, click HERS organizations.
The state energy offices of Illinois, Indiana, Iowa, Michigan,
Minnesota, Missouri, Ohio and Wisconsin and the U.S. Department of Energy's
Chicago Regional Support Office have formed a Home Energy Rating Service
and Energy Efficiency Financing Consortium. The consortium is open to lenders,
real estate agents, builders, consumers, weatherization providers, and energy
professionals in the region that are interested in home energy ratings and energy
mortgages. The goals of this effort are to help states coordinate training and
educational efforts; to provide effective marketing; develop a regional directory
of contractors, state certified raters, and lenders; and develop rating tools,
quality control, monitoring and data base services. For more information e-mail
Mary Meunier or call (608) 266-2758.