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Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Energy Efficient Mortgage Programs

If you're looking to minimize your impact on the environment, one good place to start with is by reducing your home's energy usage. There are two different methods for achieving this -- buy a new home that meets the latest energy efficiency requirements or do a series of home improvements that can have the same effect.

What is an Energy Star home?

For new construction, you could choose a home that meets or exceeds Energy Star requirements. To earn an Energy Star rating, a home or apartment must meet strict program requirements for energy efficiency developed by Energy Star's Residential New Construction program. These program requirements are based on extensive interaction with the nation’s home-building industry, including builders, developers, verification professionals, and building scientists.

Energy Star certified homes and apartments are at least 10% more efficient than homes built to current code and achieve a 20% improvement on average. Homes and apartments achieve this level of performance through a complete package of building and engineering science measures, including:

  • Complete Thermal Enclosure System. Comprehensive air sealing, properly installed insulation and high-performance windows work together to enhance comfort, improve durability, reduce maintenance costs, and lower monthly utility bills.
  • Complete Heating and Cooling System. High-efficiency systems that are engineered and installed to deliver more comfort, better moisture control, improved indoor air quality, and quieter operation.
  • A Complete Water Management System. A comprehensive package of best building practices and materials protects roofs, walls and foundations from water damage, provides added protection, and reduces the risk of indoor air quality problems.
  • Energy-Efficient Lighting and Appliances. Energy Star certified lighting, appliances, and fans are commonly installed throughout Energy Star certified homes and apartments, helping to reduce monthly utility bills, while providing high-quality performance.

To ensure that a home or apartment meets Energy Star program requirements, third-party verification by an Energy Rating Company (i.e., home energy rater or rating provider) is required. An energy rating company works closely with the builder or developer throughout the construction process to help determine the needed energy-saving equipment and construction techniques and conduct required on-site diagnostic testing and inspections to document that the home or apartment is eligible to earn the Energy Star label.

Energy Star has put together a resource to locate approved Energy Star home builders and housing energy rating and inspection companies.

For most energy-efficiency mortgage loans (EEMs), you'll need a home energy evaluator to conduct a home energy rating system report (also known as a HERS report). According to ResNet, a home energy audit will typically cost between $300 and $800. Most of these loan programs will also accept other energy audit methods, such as the Home Energy Score, developed by the Department of Energy and its national laboratories. Since the DOE does not dictate Home Energy Score fees the price varies throughout the country, you'll need to check with local providers of the evaluation to compare costs.

These ratings compare a home's existing energy usage and the expected energy usage after renovations are performed and determines the monthly energy savings the improvement will bring.

Related: Top Green Features Home Buyers Want

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. In general, conventional EEMs increase the purchasing power of buying an energy efficient home by allowing the lender to increase the borrower's income by a dollar amount equal to the estimated energy savings.

For example, let's say that your mortgage payment for a non-EEM-eligible home would normally be $900 and your typical monthly energy costs $200 for a total of $1,100. A new EEM-eligible home might only have monthly energy costs of $100; in turn, with the lower expected energy cost, a lender would then allow you to carry a $1,000 monthly mortgage payment (for the same $1,100 per month), but with more money for principal and interest payments, you can qualify to borrow more money with the same income.

What is an Energy Improvement Mortgage (EIM)?

An Energy Improvement Mortgage (EIM) is a mortgage for upgrading an existing home. It provides extra funds needed to make energy improvements; these are added to your mortgage balance.

Depending on the program, you may not have to qualify to borrow 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 available for principal and interest payments, allowing you to qualify for a larger mortgage.

Related: Four Easy Energy-Efficient Home Improvements

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: For a purchase of an already-rated energy efficient home, FHA permits the borrower's qualifying ratios to be "stretched" by two percentage points above the standard limits. This stretch recognizes energy savings, and allows a borrower to qualify for a higher loan amount.

      The FHA's EIM program adds the cost of improvements to the mortgage without requiring an appraisal of the improvements or requiring you to qualify to borrow the additional funds. However, the extra amount that can be added to the mortgage is limited.

      There are two methods for determining how much extra money 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 FHA underwriting applies.

      In general, a Home Energy Rating System provider or energy consultant will complete a measurement of your home’s energy efficiency and provide a report to both you and your lender listing recommended cost-efficient energy improvements and their estimated costs and the energy savings expected they will create. You may finance the cost of the energy inspection report as part of the mortgage if the entire package, including these fees, is "cost effective".

      "Cost effective" means that the total cost of the improvements (including any maintenance costs) is less than the total present value of the energy saved over the useful life of the energy improvement. If a new furnace uses $50 per month less fuel, is expected to last 20 years and costs $8,000, the expected return ($600 per year time 20 years, or $12,000) would make this "cost-effective".

    • VA: The VA program allows for a few different dollar amounts to be included in the mortgage balance. Up to $3,000 is allowed based solely on the documented costs of the improvement; up to $6,000 can be added, provided that the increase in the monthly mortgage payment does not exceed the expected reduction in monthly utility costs, or more than $6,000 can be tacked onto the loan amount if an appraisal shows the improvements will be 100% offset by an increase in the home's value.

      All these amounts are financed along with the first mortgage as long as the total loan amount 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: A conventional EEM increases your buying power when you choose an energy-efficient home because the lender adjusts your debt-to-income (DTI) ratio income upward to reflect your estimated energy savings. For example, Fannie Mae allows a DTI ratio up to 38% (instead of the standard 36% DTI ratio) when the lender obtains a DOE Home Energy Score Report on the subject property with a score of 6 or higher.

      For renovations and refinances, Fannie Mae's HomeStyle EEM program also increases the value of the home to reflect the addition of energy-efficient features. Fannie Mae allows initial loan-to-value ratios of up to 97%, and loan amounts of up to 15% of the "as completed" appraised value of the home once all improvements are done.

      For "basic weatherization" improvements and updates, Fannie Mae does not even requite an energy audit to be completed if the amount is less than $3,500. This can include things as water efficiency devices, renewable energy sources like solar panels and wind power devices or even geothermal systems and can even include environmental hazard damage repairs or resiliency improvements, too.

      You can also use a HomeStyle Energy mortgage to pay off any outstanding PACE loans.

      Learn more about Fannie Mae's HomeStyle Energy program.

    • Freddie Mac: Freddie Mac has a similar EIM called GreenCHOICE. Like Fannie Mae's, it also allows for loan amounts of "up to 15% of the as-completed value of the property". However, Freddie is a little more liberal when it comes to financing "basic" updates to a home, and for basic energy and/or water efficiency improvements with an aggregate cost less than or equal to $6,500, an energy report is not required. For Freddie, such "basic" improvements can include everything from programmable thermostats and caulking or weather stripping, adding insulation to attics or under floors, air conditioning/heating replacement to high efficiency units, low-flow water fixtures. high efficiency refrigerators/freezers, water heaters and light bulbs and of course replacement of windows and doors.

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.

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