Financing an
Energy-Efficient Home
October
2000
Department of Energy
The average homeowner spends close to
$1,300 a year on utility bills. But an energy-efficient home—with such
features as proper insulation, high efficiency heating and cooling systems, and
energy-efficient windows—can lower your utility bills by 10 to 50 percent.
It's easier than you may think to enjoy
the savings and comfort of an energy-efficient home. Since an energy-efficient
home is cost-effective, there are financing programs available from mortgages
to home improvement loans, which allow more people the opportunity to live in
such a home.
You can benefit from energy-efficient
financing whether you're buying, selling, refinancing, or remodeling a home. If
you're looking to buy an energy-efficient home, you can qualify for a better,
more comfortable home because with lower utility costs, you can afford a
slightly larger mortgage payment. You can also obtain financing to make
energy-efficient improvements to an older home before moving in or to your
existing home. And if you put your home on the market, you can use its energy
efficiency as an attractive selling point.
Home Energy Rating
Most energy-efficient financing
programs will encourage you to have an energy rating for your new or existing
home, which will tell you and the lender how energy-efficient it is. A rating
typically involves an inspection by a professional energy rater who is
certified under a nationally or state accredited home energy rating system
(HERS). There are several options regarding HERS, so the type of HERS used will
depend on where you live. Some states even have more than one HERS. Some of the
organizations listed at the end of this fact sheet may be able to provide you
with more information regarding HERS in your state.
Click here to see an example of a HERS and its
reports.
For the most part, an energy rater will
inspect the energy-related features of a home, such as insulation levels,
window efficiency, heating and cooling systems, and air leakage. After the
inspection, the energy rater will probably give you a report that includes the
home's energy rating along with an estimation of annual energy use and costs.
The report also may include recommended energy-efficient improvements, if
needed, and their costs, as well as the potential annual savings and eventual
payback of the improvements.
To help qualify for most
energy-efficient financing, the report usually must show that the home is
energy-efficient or that recommended improvements are cost-effective and will
save you more money than you'd be borrowing to install them. While calculating
whether a borrower qualifies for a mortgage, a lender can recognize these
savings and add the cost of the improvements into the mortgage. Or, if the home
is already energy-efficient, the lender can stretch the debt-to-income
qualifying ratio, which is expressed as a percentage (the ratio is calculated
by dividing a borrower's monthly payment obligation on long-term debts by the
borrower's net effective income or gross monthly income).
The cost of a home energy rating and
how it can be paid—by the borrower, the seller, the lender, the real
estate agent, or financed as part of the mortgage—as well as the
availability of certified energy raters, can vary from state to state and from
one energy-efficient financing program to another.
Energy-Efficient Financing Programs
You can apply for energy-efficient
financing through a government-insured or conventional loan program. Some
states even have programs for their residents, so it's a good idea to contact
your state energy office to find out if your state does.
There are two types of energy-efficient
mortgages (EEMs): one for a new home and one for an existing home. With an EEM,
you can purchase or refinance a home that is already energy-efficient. Or you
can purchase or refinance a home that will become energy-efficient after energy
saving improvements are made. Most energy-efficient financing programs offer
both types of EEMs, as well as home improvement loans for making energy
efficiency upgrades to your existing home.
Click
here to see an example of how an EEM can save you money.
Here's an overview of some of the
energy-efficient financing programs available. Each program is subject to
change; therefore, you should contact a program directly for the most current,
detailed information.
Government-Insured
U.S. Department of Housing and Urban
Development
Under the U.S. Department of Housing
and Urban Development (HUD), the Federal Housing Authority (FHA) insures
mortgage and home improvement loans, through its approved lenders, for
borrowers who would not otherwise qualify for conventional loans on affordable
terms, such as some first-time home buyers and some residents of disadvantaged
neighborhoods.
FHA Energy-Efficient
Mortgage
FHA allows borrowers to finance the
cost of adding energy-efficient improvements to new or existing homes as part
of their FHA-insured purchase or refinancing mortgage.
- Energy-efficient improvement costs of
$4,000 or 5 percent of the property value (up to $8,000), whichever is greater,
can be financed.
- The FHA maximum mortgage limit for an
area may be exceeded by the cost of the improvements.
- No additional down payment is
required.
- No requalifying is necessary.
- No new appraisal is needed.
- Up to $200 of the cost of a home
energy rating may be included in the mortgage.
This EEM can be used in conjunction with
several other FHA-insured mortgages, including the 203(k) rehabilitation
mortgage insurance described below.
FHA Section 203(k) Rehabilitation
Mortgage Insurance
FHA Section 203(k) rehabilitation mortgage insurance
provides a borrower with a single loan that covers both the purchase or
refinancing and the cost of major home improvements, including those that save
energy. The program allows borrowers to complete improvements after the loan
closes. The funds are placed in an escrow account and released as improvements
are made.
- Total cost of improvements must
exceed $5,000.
- The total property value must still
fall within the FHA mortgage limit for the area. (The property value is
determined by whichever is less: the value before the rehabilitation plus the
cost of the rehabilitation or 110 percent of the appraised value after
rehabilitation.)
FHA Energy-Efficient Home
Mortgage
When purchasing an energy-efficient
home, an FHA-approved lender can stretch the borrower's debt-to-income ratio by
2 percent.
FHA Mortgage Increase for Solar
Thermal Systems
The maximum loan limit under FHA's
standard 203(b) or 203(k) property rehabilitation mortgage insurance can be
exceeded by 20 percent if the home has or will have a passive or active solar
heating system. The home must also have a 100 percent operational, conventional
backup system.
FHA Title I Property Improvement
Loan Insurance
FHA also insures home improvement
loans, including those that will make a home more energy-efficient, for
homeowners with FHA-insured mortgages. It features:
- Loans up to $25,000 for a
single-family home
- Loans insured up to 20 years
- No required home energy rating
reports.
U.S. Department of Veterans
Affairs
The U.S. Department of Veterans
Affairs (VA) guarantees mortgage loans for veterans with active duty service
and qualified reservists. Its EEM can be used to purchase or refinance a home
along with the cost of making energy-efficient improvements. To cover the cost
of the improvements, the loan amount can be increased:
- Up to $3,000 based solely on
documented costs
- Up to $6,000 if the increase in the
mortgage payment is offset by the expected reduction in utility costs.
- More than $6,000 based on a value
determination by VA.
A VA refinancing loan may not exceed 90
percent of the home's appraised value plus the costs of the improvements.
Conventional
Most of the national lenders who offer
energy-efficient financing operate through one of the following programs.
ENERGY
STAR® Mortgage
The ENERGY
STAR® Homes program—sponsored jointly by the
U.S. Department of Energy and the U.S. Environmental Protection
Agency—promotes voluntary partnerships with home builders to construct new
homes that are 30 percent more efficient than the guidelines established by the
Model Energy Code—a "model" national standard for residential energy
efficiency.
The program also encourages lenders to
provide EEMs for certified ENERGY STAR® homes. An ENERGYSTAR® mortgage offers a minimum
2 percent stretch on a borrower's debt-to-income ratio, plus at least one
additional incentive for borrowers. Incentives may include:
- A lower interest rate
- A discount on closing costs and/or
origination fees
- Up to a 4 percent extension of the
debt-to-income ratio stretch
- Paying for the cost of the home
energy rating.
Fannie Mae
Fannie Mae—a private,
shareholder-owned corporation—operates under a congressional charter that
directs it to channel efforts into increasing the availability and
affordability of homeownership. It doesn't lend money directly to home buyers;
it purchases mortgages from lenders, ensuring that funds are available.
Energy-Efficient
Mortgage
Fannie Mae encourages lenders to offer
its EEM by providing incentives and specific criteria for those that it's
willing to purchase from lenders. Both existing and new homes fall under this
EEM.
- Several approved home energy rating
methods and programs, not just a HERS, are allowed to evaluate a home's energy
efficiency.
- For existing homes, the cost of
improvements is limited to 15 percent of its total cost. There is no limit
imposed on the cost of improvements for new construction.
- A home buyer can finance 100 percent
of the energy efficiency improvements without increasing the down payment.
Residential Energy Efficiency
Improvement Loan
Fannie Mae is partnering with utility
companies to provide loans to utility customers for the installation of
energy-efficient home improvements. The loans feature:
- A below-market interest rate
- An unsecured financing option
- Up to $15,000
- A term of up to 10 years
- A "whole-house" or bundled approach
to efficiency improvements.
Freddie Mac
Freddie Mac is a
stockholder-owned, congressionally chartered corporation that works to create a
continuous flow of funds to mortgage lenders in support of homeownership and
rental housing. It purchases mortgages from lenders and packages them into
securities that are sold to investors, providing homeowners and renters with
lower housing costs and better access to home financing.
Energy-Efficient Mortgage
Like Fannie Mae, Freddie Mac provides
incentives and criteria, as well as flexible guidelines, for EEMs that it's
willing to buy, which encourage lenders to offer them. However, the EEMs are
limited to purchasing existing energy-efficient homes or those to be
retrofitted or renovated for energy efficiency.
- Several home energy rating methods
and/or documentation, not just a HERS report, are acceptable.
- Lenders can exceed the standard 2
percent debt-to-income stretch at their own discretion.
- It allows a broader range of
energy-efficient improvements than most EEM programs.
E Seal
E Seal, an Edison Electric
Institute program, provides energy-efficient solutions for home buyers,
residential energy customers, small business customers, and home builders.
Energy Efficiency Mortgage
This EEM is available through utilities
with E Seal certified programs. It can be used to finance the purchase of a new
home with energy efficiency upgrades or to refinance an existing home while
adding these improvements. It features:
- 100 percent financing of energy
efficiency upgrades
- No additional down payment, mortgage
insurance obligation, or requalification
- Maximum qualifying ratios that are 5
percent better than standard ratios and 3 percent better than regular EEMs
- Lower than prevailing market interest
rates and closing costs.
Residential Financing Program
For energy-efficient home improvement
loans, E Seal's program participates with Fannie Mae's Residential Energy
Efficiency Improvement Loan program (see above).
When it comes to energy-efficient
financing—whether you want to purchase, refinance, or remodel a
home—it's best to work with lenders and/or real estate agents who are
familiar with home energy ratings and program requirements. If you'd like a
home energy rating report, it's also best to work with a certified energy
rater. In all instances, it's always a good idea to ask for references and
check companies with your local better business bureau.
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