Energy-Efficient Mortgages
As the mortgage industry reinvents itself, you might expect new loan products to arise. However, the energy-efficient mortgage, or EEM, is not a new concept. Although the EEM is an option that has been available through all federal mortgage programs since 1980, that option is seldom used. Industry executives estimate that less than one percent of home loans in America are EEMs.
The purpose of the instrument is to roll the cost of energy-saving home improvements into the cost of the home loan, whether for initial purchase or refinance. The projected amount of savings created by the improvements increases the borrower's debt-to-income ratio used to calculate his loan worthiness. For example, if the energy-efficient improvements were to add $50 monthly to the loan, but the projected savings was $60 per month, the lender would approve the loan.
EEMs are available as conventional, Federal Housing Administration and Veterans Administration loans. Each has slightly different parameters:
- Conventional mortgages add the annual projected savings to the annual income for calculation purposes, allowing the borrower to qualify for a more expensive home than they would otherwise. The process includes a home-energy rating prior to approval.
- FHA loans are a bit more complex. The buyer must first meet the general requirements for an FHA loan. Then the loan can be increased by the lesser of the total cost of the improvements plus related report fees, or 115 percent of the median home cost in the area. The total amount saved over the life of the improvements must be greater than their total cost. Funds for the improvements are placed in escrow until after the loan closes.
- VA loans are available for new and refinancing to qualified veterans with a cap of $3,000 to $6,000.
Unfortunately, calculations of resale price have not historically included energy-saving improvements. This trend is changing as the nation becomes more concerned with global warming. Environmentalists are hoping that green mortgages will attract more borrowers in the future.
