Like “green” tax credits and appraisals, Energy Efficient Mortgages (EEM’s) can get complicated—there are myriad types, proffered by myriad lenders, and not everyone is eligible. And yet given the current surge in green building, it’s more important than ever to understand how EEM’s can impact a developer’s ability to sell and a homeowner’s ability to purchase and maintain an energy efficient home. So, here’s an attempt to explain it all.

What IS it??

In simplest terms, an Energy Efficient Mortgage (EEM) is a type of mortgage offered to those who want to purchase an energy efficient residence. More specifically, it takes into account the lower energy expenditure in such a home—with lower utility costs, homeowners will be able to save a larger percentage of their income, and will thus qualify for a larger mortgage. 100% of the energy improvements to a new home, typically up to 15% of the value of the home, can be financed and paid for over the life of the mortgage, reserving the borrower’s cash for more immediate, move-in costs. Finally, the home appraisal (hopefully) includes the value of the energy efficient improvements.

EEM’s vs. EIM’s

Don’t be daunted—most use the two terms interchangeably. An Energy Improvement Mortgage (EIM) is actually just a type of EEM, and refers to mortgages provided for homeowners that wish to upgrade or retrofit existing residences rather than start from scratch. Like EEM’s, EIMs allow borrowers to include the cost of energy-efficiency improvements in the mortgage without increasing the down payment.

Keep in mind, both EEMs and EIMs typically require a home energy rating to provide a lender with the estimated monthly energy savings and the “Energy Savings Value”—aka, the measurable value of the energy efficient features.

How to Qualify

The EEM applies to single-unit, owner occupied principal residences, Planned Unit Developments (PUDs), and condominiums. As stated above, a borrower typically has to have a home energy rater (HERS rater) conduct a home energy rating before financing is approved. Normally, EEM qualifying homes are Energy Star Rated, so that’s always a good place to start.

Specific improvements accepted by an EEM must be deemed “cost-effective”. This means (1) that the monthly savings on your utility bills must be greater than the added monthly cost of the energy mortgage, and (2) that over the lifetime of the improvement, total savings must be greater than total costs—including all maintenance—by at least $1. This is all determined by the HERS rater. Sometimes, however, an improvement that does not fit into this category can also be financed if lumped together with the rest of the cost effective improvements.

More About HERS

HERS operates in most states throughout the country, being the most commonly utilized and recognized rating system in the nation. Assessments are performed by a certified rater, or energy auditor, who inputs data into a computer (filled with all kinds of incomprehensible equations) to produce a report. This report compares the energy efficient home against a similar residence in the area (a “reference home”) that meets the minimum energy requirements of the International Energy Conservation Code (IECC). An overall rating based on this comparison is then allotted to the residence, scoring it from 1 to 100 points, and correspondingly, from 1 to 5 stars (with a 100 point/5 star house being the most energy efficient). Below is a pic of a Colorado HERS certificate:

In addition to rating the house’s current efficiency, the report also targets areas for future improvement, detailing the estimated cost, the estimated monthly savings, and the payback time for savings to equal costs. Therefore, a HERS rating can be used to both judge if a home qualifies for an EEM, and also to pinpoint what needs to be done in an existing home to qualify for an EIM.

When your EEM is provided by the government, $200 of the cost of a HERS rating may be financed within the mortgage (as long as overall loan limits are not exceeded). Ratings currently range in cost from around $100 to $350 and average about $200.

Exceptions

Some lenders allow alternative energy audits to be performed by appraisers or energy consultants. These audits give the same type of information to, but in all cases it’s best to check with the lender first to know exactly what they require. This is more typical through the private mortgage market (non-government loans), and also depends on the state you live in. Unfortunately, the appraisal process is slightly behind the green market, so it may be more difficult to find an appraiser who (1) understands the value of energy improvements and will adjust the appraised value of the house accordingly (2) is willing to do the extra paperwork required by the private lender.

Who Are the Lenders?

There are three types of EEM lenders:

   1. Federally insured mortgage programs (FHA and VA)

   2. The conventional secondary mortgage market (Fannie Mae and Freddie Mac)

   3. Private lenders (including banks)

(1) Federal Housing Administration (FHA) EEMs follow the standard EEM guidelines, allowing borrowers to add 100 percent of the additional cost of cost-effective energy efficiency improvements to an already approved mortgage loan (so long as the additional costs do not exceed $4000 or 5 percent of the value of the home, up to a maximum of $8000, whichever is greater). Likewise, no additional down payment is required, and the FHA loan limits won’t interfere with the process of obtaining the EEM. FHA EEMs are available for site-built as well as for manufactured homes. Information about the FHA EEM can be found on FHA’s web site.

The Veteran’s Administration (VA) EEM is available to qualified military personnel, reservists and veterans for energy improvements when purchasing an existing home. The VA EEM caps energy improvements at $3,000–$6,000. More information about VA EEMs can be obtained from the Web site for the U.S. Department of Veteran’s Affairs.

(2) Conventional EEMs can be offered by lenders who sell their loans to Fannie Mae and Freddie Mac. These mortgages also follow the general rule of all EEM’s, increasing the purchasing power of a homeowner by allowing the lender to increase the borrower’s income (which increases the size of the mortgage they qualify for) by a dollar amount equal to the estimated energy savings. The Fannie Mae loan also adjusts the value of the home to reflect the value of the energy efficiency measures. For more information about Fannie Mae’s EEM visit Fannie Mae’s web site.

(3) Private lenders, which include small banks and lending firms, typically follow the above, though they may differ in what ratings they require. Homeowners looking to secure an EEM from a private lender must first do their research to determine what is needed—it will depend largely on the state you live in and the appraiser the lender assigns you.

For lenders: Fannie Mae, Freddie Mac, FHA and VA have adopted special underwriting guidelines to make financing energy efficiency less burdensome. The energy mortgage guidelines for each secondary mortgage market can be accessed on the Residential Energy Services Network (RESNET) here.

The Energy Star Pilot Program

There is a tentative #4 to be added to the above—an ENERGY STAR mortgage allows borrowers to pay for energy efficient improvements over the life of their loan and deduct the interest from their federal and state income taxes. Participating lenders also offer borrowers an additional financial benefit above and beyond the value of the home energy savings, such as discounted mortgage rates, reduced loan fees, or assistance with closing costs.

While an Energy Star mortgage, an EEM and an EIM all take into account the savings associated with reduced energy use, the ENERGY STAR mortgage pilot program has requirements that are different than those offered by Fannie Mae, Freddie Mac, FHA, and VA, related specifically to the current Energy Star for Homes Program. Borrowers can, however, apply for a mortgage that qualifies as an ENERGY STAR mortgage AND an EEM or EIM—for example, a borrower could receive the financial benefit provided by a participating lender for an ENERGY STAR mortgage and also qualify for an EEM, thus taking advantage of the EEM’s benefit of permitting the use of higher expense to income and debt to income ratios.

The Energy Star Mortgage Pilot Program is currently underway in Maine and Colorado, and is being initiated in Massachusetts, New York, New Jersey, Pennsylvania, and the District of Columbia.

What Happens After You Get an EEM?

After the loan goes through there is a limited amount of time for a borrower to complete their improvements, usually between 90 and 180 days depending on the lender. Money for the improvements is held by the bank in an escrow holdback account until the construction or retrofit is complete. Since the improvements are already chosen when the loan application is made, and a contractor can be found before the loan is granted, 90 days is usually more than enough time to complete a retrofit. Most contractors will finish the job before receiving payment, so the escrow holdback shouldn’t create any problems. In the case of do-it-yourself remodels, though, the underwriter may only grant an energy loan for the cost of materials.

Questions?

The Environmental Protection Agency has a page dedicated to EEM’s, and lists all Energy Star Homes lenders that will underwrite EEM’s– click here to take a look. If you are a lender and would like to become an Energy Star Lender Partner click here. To access RESNET’s database of Maryland certified home raters, click here. Or, if you need more advice on how to get an EEM or a HERS rater to assess your home, email anna@onegreenhomeatatime.com.