Energy Efficient Mortgages
By Chad Feagler, Mountain Energy Consultants
In our current economic time homeowners and home buyers are finding it more difficult to qualify for a mortgage. If you are looking to buy an energy efficient house or improve or refinance your existing home, you may want to look into an Energy Efficient Mortgage (EEM) as it is a great way to finance energy-efficient upgrades without paying anything out of pocket.
While EEM programs are offered by numerous groups including Fannie Mae and the Veteran's Administration, the Federal Housing Administration (FHA) has the most popular. Contrary to popular belief, the FHA does not lend money; instead, the FHA is the department of the US government that insures mortgages. Basically the FHA guarantees the lender that if the homeowner defaults on the mortgage, the US government will step in and make good the default.
Surprisingly, qualifying for a FHA loan is not that difficult. In fact, the qualification requirements are quite reasonable compared to those of other loan programs. If you qualify for a FHA mortgage you automatically qualify for an FHA EEM. The FHA EEM will let you borrow more money for energy efficient improvements. Typical upgrades include: increased insulation in walls and ceilings, conditioning crawlspaces (insulating the area and adding a heat source will drastically cut down on utility costs), sealing ducts and the building envelope, and replacing windows. You can NOT use the EEM to replace inefficient appliances.
The amount you can borrow with an FHA EEM is limited to the lesser of 5% of the appraised value of the home or $8,000 (with a minimum of $4,000). The money is rolled into the mortgage with the idea that the increase in the monthly payment will be offset by a reduction in the utility bills.
The home must be analyzed by a Residential Energy Services Network (RESNET)-certified Home Energy Rater (HERS). The rater will analyze the home and enter its characteristics into certified software. From this point the rater will then input recommendations about energy improvements into the software. A Home Energy Report (HERS report) is generated showing the improvements, their cost, and the predicted reduction in utility costs. If the improvements pay for themselves during their useful lifetime, you can then add them to the EEM.
The HERS report and the homeowner-selected set of improvements become part of the escrow process. Once escrow closes, the homeowner or a general contractor hires licensed contractors to complete the upgrades. They are paid with money held back in escrow. When the work is completed the HERS rater inspects the upgrades to ensure that they were done properly. The final inspection may also include a blower door test or duct testing to verify improvements.
Usually EEMs are used to purchase or refinance existing homes. You can also use an EEM to purchase a new, already energy-efficient house. In the case of the new home the only real benefit is that the qualification ratios are stretched from 29% and 41% to 31% and 43% letting you qualify for a larger mortgage.
The EEM is not only a good thing for the homeowner but affects the local population as well by lowering the cost of ownership, reducing pollution in the environment, improving resale value, and providing bigger and increasingly more secure loans for banks.
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