A green loan is a loan that is based on energy-efficiency criteria. Energy efficiency is good for homeowners because it reduces utility bills. Energy efficiency also benefits the environment by decreasing water, electricity, and gas use—and by reducing greenhouse gas emissions and other types of pollution.
There are several types of green loans available to encourage energy-efficient homeownership. Learn more about green loans, including the various types, how you can use them, and how to apply for one.
- A green loan is a mortgage or other loan specifically intended to fund the purchase of energy-efficient homes and to make energy-efficient improvements.
- The FHA’s Energy Efficient Mortgage program and Fannie Mae’s HomeStyle Energy Mortgage both fund efficiency improvements via new-purchase mortgages and refinances.
- Green loan programs can be bundled with other improvement loan programs, such as loans for rehabilitation or solar- and wind-power installations.
What Are Green Loans?
A green loan is another descriptor for an energy-efficient loan or a green mortgage. In other words, it is a loan specifically available for homebuyers who want to purchase an energy-efficient home, or homebuyers and homeowners who want to make changes to the home to make it more energy efficient. Besides energy efficiency, there are other reasons to consider this type of loan.
“Both the FHA and conventional mortgage programs provide green mortgages, which may have more flexible credit requirements, and the potential for a lower interest rate,” Andrina Valdes, COO of Cornerstone Home Lending in San Antonio told The Balance by email.
The National Association of State Energy Officials is a nonprofit association for the governor-designated energy officials in each U.S. state. Contact your state energy office to see what types of green loan programs are available in your area.
What Can Green Loans Be Used For?
Green loans can fund efficiency projects large and small.
“Fannie Mae’s HomeStyle Energy mortgage, for example, can be used to buy or refinance a home with the purpose of making energy-efficient upgrades,” Valdes said. “This particular loan program offers flexibility, since it can be used to improve the energy and water efficiency of a home, as well as to make a home more resilient to natural disasters by outfitting storm surge barriers, retaining walls, etc.”
Some of the improvements a green loan typically covers include:
- Energy-efficient heating, ventilation, and cooling systems (HVAC)
- Double-pane windows and energy-efficient doors
- Energy-efficient water heaters
- Smart thermostats
- Insulation and weatherization
- Water-smart landscaping
- Solar panels
- Geothermal power
- Wind power
- LED lighting
- Energy-efficient appliances
Types of Green Loans
There are several green loans available, both for purchases and refinance.
FHA Energy Efficient Mortgage
With an FHA Energy Efficient Mortgage, borrowers can select cost-effective improvements for a newly constructed or existing home based on the results of an analysis and subsequent recommendations of a home-energy assessor.
A “cost-effective” improvement for an existing home, according to the FHA, is one that will pay for itself in savings over the improvement’s expected lifetime. For new construction, an improvement is considered cost-effective if it exceeds the most recent standards set by the International Energy Conservation Code.
The amount that can be financed is the lesser of the cost of the improvements or 5% of one of the following: the adjusted value of the home, 115% of the median area price, or 150% of the national conforming mortgage limit.
HomeStyle Energy Mortgage
With the HomeStyle Energy Mortgage, sponsored by Fannie Mae, borrowers can use up to 15% of the appraised value (after upgrades are completed) for new energy improvement. For example, if after upgrades the home is appraised at $100,000, the borrower may receive up to $15,000 from the mortgage to use for those upgrades.
For homeowners refinancing, a cash-out refinance is available, and it is also for up to 15% of the home’s value. The cash from the refinance would be used to pay for the improvements.
These loan programs can be bundled with other loan programs. For example, an FHA-backed energy-efficient Mortgage can be combined with an FHA-backed Rehabilitation Mortgage to fund energy upgrades along with rehabilitation projects.
Other Green Mortgage Programs
Aside from the FHA, banks and credit unions may offer their own types of green loan or green mortgage programs. Contact your local mortgage lenders to see if they offer this option.
Another option is to apply for a personal loan from your bank or mortgage company to finance your home renovation project. Even if it’s not classified as a green mortgage, per se, the loan can be used to make energy-efficient improvements.
How To Get a Green Loan
The application process for getting a green loan is similar to the process for a regular mortgage. For example, mortgage lenders will need proof of employment and income, and they’ll check your credit score and debt-to-income ratio. However, there will be an additional step.
Depending on the program, FHA loan requirements will also include an energy audit by a qualified energy rater. This person will inspect the home for air and water leakage, insulation levels, window and door efficiency, etc., then create a report that lists the home’s rating and includes recommendations for energy updates and their associated costs.
“Since an energy-efficient mortgage should help you to cut down on your monthly energy expenses over time, you may also be able to qualify for a higher loan amount,” Valdes said.
The Bottom Line
Energy efficiency is good for homeowners and it’s also good for the environment. An energy-efficient home is not only more comfortable, but it costs less to operate—and saving fuel and water helps present and future generations.
While the mortgage application process is typically the same as with a regular mortgage, lenders will also require a home-energy audit, which assesses the home’s current status and provides a road map for making energy-efficient changes.