Energy Efficient Mortgage Programs

What Are Energy Star Homes?

Energy Star homes must be no more than three stories high; they meet rigorous environmental standards and offer the following features:

  • Effective insulation in floors, walls, and attics.
  • High-performance windows that keep heat out in the summer and keep heat in during the winter. They come with protective coatings and special frames.
  • Sealed cracks and ducts to reduce drafts, moisture, noise, dust and pollen, making the home more comfortable and efficient.
  • Extra-efficient heating and cooling systems.
  • Energy Star-rated appliances and fixtures -- refrigerators, dishwashers, water heaters, washing machines, ventilation fans, lighting fixtures, and compact fluorescent bulbs.

Independent energy raters help builders choose the right systems, fixtures and appliances, and also conduct onsite testing and inspections to certify that the home meets Energy Star standards.

How Does an Energy Improvement Mortgage (EIM) Work?

An Energy Improvement Mortgage (EIM) is for upgrading an existing home. It provides the extra money needed to make energy improvements, which is added to your mortgage. You don't generally have to qualify for the extra amount, and you can finance the entire cost of eligible improvements. When your home is energy-rated, the estimated savings created by your projected improvements may be added to your income, allowing you to qualify for a larger mortgage.

How Does an Energy Efficient Mortgage (EEM) Work?

Energy Efficient Mortgages (EEMs) are loans for purchasing new energy-efficient houses. You may be offered more advantageous terms and qualify for a larger mortgage. Your projected utility savings may be added to your income, or your qualifying ratios will be adjusted.

What Mortgage Products Are Available and How Do They Help?

There are several EEMs and EIMs available from a variety of agencies and providers. They can be used to purchase new energy-efficient homes, improve purchased homes, or upgrade and refinance currently owned houses. They are available from:

  • FHA: The program adds the cost of improvements to the mortgage without requiring an appraisal of the improvements. The extra amount that can be added to the mortgage is limited. There are two methods for determining how much extra can be obtained. (1) With no appraisal of the improvements to be done is desired, the limit is $4,000; or (2) With an appraisal of the improvements, the amount can be 5% of the appraised value of the existing property, up to a maximum of $8,000. The extras are not subject to down payment requirements, and the total can exceed FHA loan limits. If you're qualified, you can even save money by doing the work yourself! Standard underwriting applies.
  • VA: The VA program allows up to $6,000 in improvements (or more if an appraisal shows the improvements will be 100% offset by an increase in the home's value) to be financed along with the home as long as the total does not exceed VA loan limits. No special underwriting is required; in fact, the VA says that the mortgage lender "must evaluate the veteran's ability to pay the increased loan payments caused by addition of energy efficiency improvements."
  • Fannie Mae and Freddie Mac: The conventional EEMs increase your buying power when you choose an energy-efficient home because the lender adjusts your income upward to reflect your estimated energy savings. Fannie Mae's HomeStyle EEM program also increases the value of the home to reflect the addition of energy-efficient features. Freddie Mac doesn't have a separate program, but makes underwriting concessions on energy-efficient homes. Freddie's program adds 2% to allowable qualifying ratios. For home purchases, the cost of the energy-efficient improvements may be added to the purchase price.
  • EPA: EPA's Energy Star mortgages and loans may come with several advantages, including free energy rating inspections, higher allowable qualifying ratios, discounted mortgage rates and reduced closing costs. Lenders offering these loans choose which of these benefits to offer, so it pays to shop around. Energy Star mortgages can only be offered to people who buy Energy Star houses; the home must be at least 30% more energy-efficient than the Model Energy Code requires.

Whether you buy a new energy-efficient home, get a fixer-upper and make green improvements, or refinance and upgrade your current home, going green means more than saving the environment -- it means saving money too.

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

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