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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2017

Plug into a Greener Home

Energy mortgage programs help borrowers make improvements

Plug into a Greener Home

Many borrowers are seeking energy-efficient homes these days to provide a more comfortable living environment, save money on their utility bills and become more environmentally friendly. Recent research from the National Association of Home Builders reveals that homeowners prefer features that will help them save energy as well as homes with energy-efficient windows and highly rated insulation.

Energy mortgage programs, which can be used to pay for energy-efficiency improvements, have been around for years, but increasing interest in eco-friendly homes means they now are starting to get more attention. Originators should know the basics of these programs to help borrowers plug into the green home of their dreams.

Some of the basic upgrades a homebuyer can make using energy-related mortgage products include adding attic and wall insulation, sealing or replacing ducts, installing weather stripping and caulking to seal air gaps, upgrading to high-performance windows and sliders and installing high-efficiency furnaces and air conditioners. Let’s look at the ins and outs of two important energy mortgage programs that borrowers can use to make these upgrades.

Energy Efficient Mortgage

The Energy Efficient Mortgage, or EEM, is not a new program, but it may be a new idea to many mortgage originators. The EEM is a feature added to a Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loan program that allows borrowers to save money on utility bills by adding the cost of energy-efficiency improvements into the mortgage.

EEMs are available for both homebuyers and existing homeowners who are refinancing. Although the program has some unique features, the Energy Efficient Mortgage is easy to underwrite and helps borrowers obtain a better, more comfortable home while lowering their utility costs. Borrowers can even combine the EEM with utility rebates to increase their savings.

EEMs recognize that reduced utility expenses can allow homeowners to make higher mortgage payments. Lenders are therefore encouraged to make mortgage credit available to borrowers who might not otherwise qualify for conventional loans on afford-able terms, such as first-time homebuyers. Borrowers do not have to qualify for the additional EEM money and it does not affect the downpayment amount.

All borrowers who qualify for standard FHA or VA mortgages can qualify for the EEM portion as long as the value of the energy savings, based on current value, is more than the cost of the energy package, including maintenance. Depending on the number of energy improvements made, the savings can vary. Just improving windows alone may not improve overall energy savings, for example, but combined with other improvements like duct sealing or insulation, the home’s annual savings can be significant.

With the EEM, lenders recognize the savings these upgrades will bring and allow borrowers to use these potential savings like extra cash. If the home receives $12,000 in energy upgrades, for example, that may add $50 per month to the mortgage over the life of the loan, so the estimated energy savings will need to be greater than $50 per month to make the EEM worthwhile.

Lenders also can offer higher qualifying ratios to borrowers if the property meets standards for energy efficiency once improved. Homes built or retrofitted in conformance with the International Energy Conservation Code (IECC) standards for 2000 or later, allow lenders to “stretch” the borrower’s debt-to-income ratio, which means a larger percentage of the borrower’s monthly income can be applied to the mortgage payment.

The maximum amount of energy-efficiency improvements that a borrower can finance through an FHA EEM is the lesser of:

  • 5 percent of the value of the property;
  • 5 percent of 115 percent of the median price of a single-family dwelling in the area; or
  • 5 percent of 150 percent of the conforming Freddie Mac limit.

For a $250,000 property, this could mean up to $12,500 in energy improvements on an FHA loan. For VA financing, the dollar amount for energy upgrades caps at $6,000.

Up to 100 percent of the cost of energy-efficiency improvements can be added to an FHA or VA home loan with an EEM, but a certified Home Energy Rating System (HERS) energy audit must be performed on the property by a certified HERS energy rater. The HERS rating indicates the most cost-effective way to improve a home’s efficiency. The rater audits the efficiency of the home’s energy characteristics, such as the heating and air-conditioning systems, insulation levels, window efficiency and condition of the duct work.

Some raters only perform a “test-in” audit, which measures home efficiency before improvements. This test should occur within a week of mortgage application to avoid closing delays. Other HERS raters also will perform a “test-out” audit, which measures energy efficiency after improvements. This audit can help the borrower qualify for potential utility or energy company rebates, but is not required for the EEM.

Originators who wish to provide EEMs to their clients should consider partnering with an EEM facilitator. The facilitator will work with the borrower, HERS rater, contractor, Realtor, and even the loan processor and underwriter to ensure everything goes smoothly. After closing, the facilitator makes sure the installation of selected energy improvements are completed and reminds the contractor, Realtor and borrower of any rebates to be requested.

Fannie Mae HomeStyle Energy

Fannie Mae used to offer an EEM product as well, but today the government-sponsored enterprise offers the HomeStyle Energy mortgage in its place. The HomeStyle Energy loan is designed to help lenders offer financing for home-owners to increase their home’s energy efficiency and reduce utility costs. It can be used when purchasing or refinancing a home.

“Fannie Mae designed HomeStyle Energy to provide homeowners with an affordable way to finance energy or water-efficiency home improvements or to pay off debt from previous energy upgrades. In addition, HomeStyle Energy offers a simplified process for homeowners who want to finance up to $3,500 to weatherize or make changes to improve water efficiency in their homes,” says Jodi Horne, a senior risk manager at Fannie Mae.

Borrowers can finance up to 15 percent of the as-completed appraised property value of a home through a HomeStyle Energy loan, but an energy report is required for amounts greater than $3,500. They can finance up to $3,500 in weatherization or water-efficiency improvements with no energy report, however.

HomeStyle Energy loans are only available on one- to four-unit existing properties — excluding manufactured homes — and up to a 95 percent loan-to-value ratio can be financed. The program is open to all Fannie Mae-approved lenders — with no special lender approval required. A $500 loan-level price adjustment, or LLPA credit, will be applied when the loan is delivered to Fannie Mae with the applicable special feature code (SFC) 375.

The HomeStyle Energy loan can be useful when homeowners incur expensive consumer debt because of a home emergency, such as a furnace or air-conditioner failure. It also can help homeowners who may not have had time to shop around for affordable financing options, and may offer a lower-cost option to refinance existing energy-improvement debt.

HomeStyle Energy loans also may provide a more affordable-financing solution than a subordinate lien, home equity line of credit, Property Assessed Clean Energy (PACE) loan, or an unsecured loan. HomeStyle loans also allow borrowers to pay off higher-interest energy-improvement debt, including PACE loans, through a limited cash-out refinance.

PACE-retrofitting lending programs are made available by localities to finance residential energy improvements. These are generally repaid through the homeowner’s property tax bill. PACE programs typically have automatic first-lien priority over previously recorded mortgages. This is important to note with Fannie Mae and Freddie Mac uniform security instruments, which prohibit loans that have senior-lien status to a mortgage.

When paying off non-PACE debt under the HomeStyle Energy loan program, Fannie Mae requires that the energy improvements have a cost-effective component.

•  •  •

The Fannie Mae HomeStyle Energy and FHA EEM programs have lower financing cost options than PACE loans and are more borrower-friendly. Originators should learn about these different programs so they can help their borrowers make educated and financially sound choices when improving their homes. These loans are a cost-effective way for borrowers to improve their homes, which can then improve client loyalty and increase future referrals.


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