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 MECcheck, developed by the U.S. Department of Energy's
Building Standards and Guidelines Program along with Pacific Northwest National
Laboratory (PNL). To order MECcheck materials over the telephone call the
MECcheck hotline at 1-800-270-2633.
To find out more about MEC and downloading software on line, click download MECcheck.
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.