Green Financing

By Amy Le
HomeFinder.com

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Eligibility Requirements for Energy-Efficient Mortgages

Green mortgages may not make up the meat and potatoes of the U.S. mortgage industry's $10 trillion pot, but with rising energy costs and growing fears of global warming, these unique financial products are quickly finding a place in today's housing market. Similar to the green movement, energy-efficient mortgages (EEMs) didn't just spring up overnight. These types of mortgages have been around for the past 30 years with little notoriety or success. But in 1995, Congress expanded a pilot demonstration of EEMs nationwide. EEMs recognize that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage.

FHA and VA energy-efficient mortgages

The U.S. Federal Housing Administration's (FHA) EEMs provide mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The borrower does not have to qualify for the additional money and does not make a down payment on it. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, or savings and loan association, and the mortgage is insured by HUD. FHA insures loans. FHA does not provide loans. The U.S. Department of Veterans Affairs (VA) also offers a version of the EEM. Clients who qualify for an FHA loan can add the cost of 'cost-effective' energy improvements to their purchase or refinance mortgage. The FHA allows for an additional $4,000 or 5 percent of the loan amount, capped at $8,000. VA loans are capped at $6,000. FHA and VA EEMs have a low down payment policy — about 3.5 percent — and a structure that supports an energy audit escrow. With an FHA EEM, first-time homebuyers can buy a house, have the upgrades installed within 90 days and live in a home that costs less to run every day thereafter. Upgrades can include insulation, upgrades to air filters, sealing air ducts, lighting and windows. EEMs cannot be applied towards energy-efficient home appliances.

Some of the eligibility requirements for EEMs:

• To be eligible for inclusion in this 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 report which is done by a home energy rating system (H.E.R.S.) or energy consultant. The cost of the energy rating may be financed as part of the cost-effective energy package. The cost of the improvement must be less than the cost of the energy saved over the life of the improvement — typically 30 years.
• The energy improvements are installed after the loan closes. The lender will place the money in an escrow account. The money will be released to the borrower after an inspection verifies that the improvements are installed and the energy savings will be achieved.
• The maximum mortgage limit for a single family unit depends on its location, and it is adjusted annually. At the HUD.gov Web site, you can find FHA maximum mortgage limits for any county in the country. The cost of the eligible energy efficient improvements is added to the mortgage amount. The final loan amount can exceed the maximum mortgage limit by the amount of the energy efficient improvements.

Jeff Bricmont, one of the founders of Southern California-based Modern Earth Finance, says that an EEM captures the savings the homeowner will receive from energy-efficient improvements over the life of the improvement and treats that savings as income. With more income, the borrower can qualify for a larger loan that covers a purchase or refinance as well as the cost of energy-efficient improvements.

Modern Earth Finance provides traditional mortgage broker services, in addition to working with clients who are building green, buying a green house or remodeling existing homes to make them more energy-efficient. The firm offers two kinds of green loans — a green Process Loan and an EEM.

'The average home looses as much as 30 percent of its heating or cooling through leaky air ducts,' Bricmont says. 'A few hundred dollars to repair ducts can save thousands of dollars in a few years. The EEM-loan process can help homebuyers determine what work to undertake and how to manage the money for those improvements.'

To learn more about the eligibility requirements for EEMs visit HUD.gov.