Federal Loan Programs for Energy Efficient Mortgage
Energy Efficient Mortgage
||Federal Loan Program
|Eligible Efficiency Technologies
||Yes; specific technologies not identified
|Eligible Renewable/Other Technologies
||Passive Solar Space Heat, Solar Water Heat, Solar Space Heat, Photovoltaics, Daylighting
Energy efficient mortgages (EEMs) can be used by homeowners to finance a variety of energy efficiency measures, including renewable energy technologies, in a new or existing home. The federal government supports these loans by insuring them through FHA or VA programs. This allows borrowers who might otherwise be denied loans to pursue energy efficient improvements, and it secures lenders against loan default and provides them with confidence in lending to customers whom they would usually deny.
The federal government also certifies private lenders to provide EEMs through the ENERGY STAR® program, which does not provide the same security as the FHA or VA programs but offers ENERGY STAR ® certification. Other private lenders, like Fannie Mae and Freddie Mac, offer “conventional energy efficient mortgages” that may or may not require homes to meet Energy Star standards.
Federal Housing Authority (FHA) Energy Efficient Mortgages
The FHA allows lenders to add up to 100% of energy efficient improvements to an existing mortgage loan by insuring a loan of up to 5% of a home’s appraised value or $4,000, whichever is greater, not to exceed $8,000. FHA mortgage limits vary by county/state and the number of units in a dwelling; see www.fha.com/lending_limits.cfm for more details.
Loan amounts cannot be greater than the projected savings of the energy efficient improvements. This loan can be combined with FHA 203 (h) mortgages made to victims of presidentially-declared disasters and with financing offered through the FHA 203 (k) rehabilitation program. FHA loan limits do not apply to the EEM. Home buyers must submit a Home Energy Rating (HER), contractor bids, and a FHA B Worksheet. Up to $200 of the cost of the HER can be included in the mortgage, and borrowers can include closing costs and the up-front mortgage insurance premium in the total cost of the loan. The loan is available to anyone who meets the income requirements for FHA’s Section 203 (b), provided they can make the monthly mortgage payments. New and existing owner-occupied homes of up to 2 units qualify for this loan. Cooperative units are not eligible. Home buyers can submit applications to their local HUD Field Office through an FHA-approved lending institution, or they can apply directly online at http://www.fha.com/energy_efficient.cfm. See also www.hud.gov/offices/hsg/sfh/eem/energy-r.cfm.
Department of Veterans Affairs (VA) Energy Efficient Mortgages
The VA insures EEMs to be used in conjunction with VA loans for either the purchase of existing dwellings or refinancing loans secured by the dwelling. Home buyers can borrow up to $3,000 if only documentation of improvement costs or contractor bids is submitted, or up to $6,000 if the projected energy savings are greater than the increase in mortgage payments. Loans may exceed this amount at the discretion of the VA. Applicants cannot include the cost of their own labor in the total amount. No additional home appraisal is needed but applicants must submit a HER, contractor bids, and other documentation. The VA insures 50% of the loan if taken by itself, but it may insure less if the total value of the mortgage exceeds a certain amount.
This mortgage is available to qualified military personnel, reservists and veterans (see www.homeloans.va.gov/elig2.htm for more details). Applicants should secure a certificate of eligibility from their local lending office and submit it to a VA-approved private lender. If the loan is approved, the VA guarantees the loan when it is closed.
ENERGY STAR® Energy Efficient Mortgages
These mortgages, unlike those insured by the FHA and VA, are not guaranteed by a particular federal agency. At the time of this writing, the Environmental Protection Agency’s ENERGY STAR program listed 49 private lenders who offer home buyer assistance, home energy rating assistance, special financing, and other assistance to applicants buying homes with the ENERGY STAR rating. The EPA requires ENERGY STAR-approved lenders who offer FHA EEMs to provide those to qualified borrowers. Borrowers should apply directly to those lenders listed on the ENERGY STAR website.
Conventional Energy Efficient Mortgages
Like ENERGY STAR ®, conventional mortgages are not backed by a federal agency. Private lenders sell loans to Fannie Mae and Freddie Mac, which in turn allow home buyers to borrow up to 15% of an existing home’s appraised value for improvements documented by a HER.
Fannie Mae also lends up to 5% for ENERGY STAR new homes. Fannie Mae EEMs are for single-family, owner-occupied units, and they provide EEMs to those whose income might otherwise disqualify them from receiving the loans by allowing approved lenders to adjust borrowers’ debt-to-income ratio by 2%. The value of the improvements is immediately added to the total appraised value of the home.
Freddie Mac offers EEMs for 1-4 unit dwellings and also helps raise the effective income of the borrower to qualifying levels by allowing lenders to increase the borrower’s income by a dollar amount equal to the estimated energy savings. Any energy efficiency improvements can qualify, and these mortgages can be combined with both fixed-rate and adjustable-rate mortgages. Borrowers should apply directly to the lender. See www.natresnet.org/resources/lender/default.htm for more details.