Conventional EEMs

Fannie Mae also lends up to 5% for Energy Star new homes. Fannie Mae EEMs are available to single-family, owner-occupied units, and Fannie Mae provides 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 one- to four-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.

Department of Veterans Affairs (VA) Energy Efficient Mortgages

The VA insures EEMs to be used in conjunction with VA loans either for the purchase of existing homes or for refinancing loans secured by the dwelling. Homebuyers may 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 may not 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 certain 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.

FHA Energy Efficient Mortgages

In the last few years, FHA loans have become the loan of choice for people putting down around 5%. The FHA allows lenders to add up to 100% of energy efficiency improvements to an existing mortgage loan with certain restrictions. 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. These mortgages were previously limited to $8,000. In June 2009, HUD issued Mortgagee Letter 2009-18 which announced the removal of the dollar cap. The maximum amount of the portion of an energy efficient mortgage allowed for energy improvements is now the lesser of 5% of:

• The value of the property,
• 115% of the median area price of a single-family dwelling, or
• 150% of the Freddie Mac conforming loan limit

Loan amounts may not exceed the projected savings of the energy efficiency improvements. FHA loan limits do not apply to the EEM. Presently, up to $200 of the cost of the HER may be included in the mortgage, and borrowers may 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 the applicant can meet the monthly mortgage payments. New and existing owner-occupied homes of up to two units qualify for this loan.

The Good & the Bad News of Energy Efficient Mortgages (EEM’s). EEM’s do exist, but to be honest I have not been able to find a single person who has done one. I am sure they out there, but they are far and few in-between.

Homeowners can take advantage of EEM to finance a variety of energy efficiency measures, including renewable energy technologies, in a new or existing home. The U.S. federal government supports these loans by insuring them through Federal Housing Authority (FHA) or Veterans Affairs (VA) programs. This allows borrowers who might otherwise be denied loans to pursue energy efficiency improvements, and it secures lenders against loan default.

In general, the idea is that the EEM allows the lender to:
1. Finance above the appraised value
In theory, this sounds like a reasonable idea. Then the appraiser does not necessarily have to take into account the energy efficient items and the lender can exceed the appraised value. In practicality, in the current real estate market, mortgage underwriters are already panicked about valuation after the last few years. Trying to explain this process to a mortgage underwriter who is not familiar with an EEM is like to talking Greek to a Texan. You just get that blank stare or silence on the other end of the telephone. As mentioned earlier, as “green” building gains some momentum and the industry gets trained, I am sure this will not be as big of an issue. For now, at Amaris, we make our best effort to build the cost into the normal appraisal and by-pass this entire headache.

2. Stretch the debt to income ratio for qualification
Again, similar to financing in excess of the appraised value, stretching the debt to income has the same challenges with the mortgage underwriter. Some programs allow this stretching the debt to income ratio, while other programs do not. The idea is that an energy efficient home will have lower utility bills forever. If you qualify for a mortgage of 2,500.00 per month and the utilities are going to be 250 per month, it only makes sense that a 2,600 per month mortgage payment with 150 per month utilities should not be a problem. With our customers, we do not stretch them in the qualification process and to be honest the trend by customers is fiscal prudence and they would not necessarily want to stretch financially anyway.