How to Get an Energy Efficient Mortgage
FHA Energy Efficient Mortgages Can Exceed the Sales Price
Energy efficient mortgages have been around for a long time, long enough that most people have forgotten about this under-utilized type of financing. If you're holding off buying a foreclosure because the home has an older furnace that needs to be replaced, or single pane windows and you want dual pane, an energy efficient mortgage might be your answer. An energy efficient mortgage can be rolled into your existing mortgage and you can use that money to pay for energy efficient improvements.
It's easy to get an energy efficient mortgage. Borrowers may finance 100% of the improvements. There is no need to qualify separately for the additional financing because the energy savings will most likely offset the increased mortgage payments. This means that yes, the lender calculates how much you will save on your utility bills by upgrading and making improvements, and the underwriter will use that dollar amount to reduce your ratios. This is important if your income to mortgage debt percentage is already at the maximum amount allowed for a PITI payment.
Types of Energy Efficient Improvements that Qualify for an Energy Efficient Mortgage
An energy efficient mortgage should result in substantial savings on monthly utility bills, plus energy efficient improvements may also increase the value of your home, in addition to helping to conserve valuable energy resources. Here are some types of improvements that may qualify for an energy efficient mortgage:
- Heating and cooling systems
- Insulation in the attic, walls, and floors
- Energy efficient windows such as dual pane
- Duct system installation and repairs
- Water heaters
- Energy efficient appliances such as washers, dryers, and refrigerators
- New "cool" roofs
Types of Energy Efficient Mortgages
Three basic types of loans qualify for an energy efficient mortgage.
Although the maximum amounts may vary, depending on the type of loan, the determination is based on the improvement reducing energy use, thereby offsetting the cost of the upgrade. Here are types of loans that offer energy efficient mortgages:
FHA Offers a Popular Energy Efficient Mortgage
Many home buyers take out FHA loans because the minimum down payment requirement is only 3.5% of the purchase price. If the cost of the improvements is less than the present value of the energy saved, FHA will let you add the cost of the improvements to your loan. The maximum amount of the mortgage must be the lesser of:
- 5% of the value of the property, or
- 115% of the median area price of a single family home, or
- 150% of the conforming Freddie Mac limit
Regardless of FHA guidelines, most banks have overlays that limit the amount, which caps out at $8,000, plus an additional $2,000 for weatherization.
HERS Reports and FHA Energy Efficient Mortgage
Buyers who qualify for an FHA loan automatically qualify for financing an energy efficient mortgage. However, the property must be evaluated for the improvement. For example, if the existing HVAC system is only 5 years old, the cost of a new system might not offset the savings and therefore will not qualify.
An energy rater will prepare a HERS (home energy rating system) report. The cost of this report could vary between $250 and $800. Sometimes the cost of the HERS report can be rolled into the loan. The HERS report will:
- Recommend types of upgrades
- Estimate energy savings
- Estimate life of upgrades
Tip: Be aware that HUD guidelines give a buyer 90 days to finish the work. However, many banks require that the work be completed within 14 days. If you plan to order custom windows, for example, you might want to make sure those windows will arrive and be installed within the 14-day window.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.