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Financing an Energy-Efficient Home
The average homeowner spends close to $1,300 a year on utility bills. But an energy-efficient homewith such features as proper insulation, high efficiency heating and cooling systems, and energy-efficient windowscan lower your utility bills by 10 to 50 percent.
It's easier than you may think to enjoy the savings and comfort of an energy-efficient home. Since an energy-efficient home is cost-effective, there are financing programs available from mortgages to home improvement loans, which allow more people the opportunity to live in such a home.
You can benefit from energy-efficient financing whether you're buying, selling, refinancing, or remodeling a home. If you're looking to buy an energy-efficient home, you can qualify for a better, more comfortable home because with lower utility costs, you can afford a slightly larger mortgage payment. You can also obtain financing to make energy-efficient improvements to an older home before moving in or to your existing home. And if you put your home on the market, you can use its energy efficiency as an attractive selling point.
Home Energy Rating
Most energy-efficient financing
programs will encourage you to have an energy rating for your new or existing
home, which will tell you and the lender how energy-efficient it is. A rating
typically involves an inspection by a professional energy rater who is
certified under a nationally or state accredited home energy rating system
(HERS). There are several options regarding HERS, so the type of HERS used will
depend on where you live. Some states even have more than one HERS. Some of the
organizations listed at the end of this fact sheet may be able to provide you
with more information regarding HERS in your state.
For the most part, an energy rater will inspect the energy-related features of a home, such as insulation levels, window efficiency, heating and cooling systems, and air leakage. After the inspection, the energy rater will probably give you a report that includes the home's energy rating along with an estimation of annual energy use and costs. The report also may include recommended energy-efficient improvements, if needed, and their costs, as well as the potential annual savings and eventual payback of the improvements.
To help qualify for most energy-efficient financing, the report usually must show that the home is energy-efficient or that recommended improvements are cost-effective and will save you more money than you'd be borrowing to install them. While calculating whether a borrower qualifies for a mortgage, a lender can recognize these savings and add the cost of the improvements into the mortgage. Or, if the home is already energy-efficient, the lender can stretch the debt-to-income qualifying ratio, which is expressed as a percentage (the ratio is calculated by dividing a borrower's monthly payment obligation on long-term debts by the borrower's net effective income or gross monthly income).
The cost of a home energy rating and how it can be paidby the borrower, the seller, the lender, the real estate agent, or financed as part of the mortgageas well as the availability of certified energy raters, can vary from state to state and from one energy-efficient financing program to another.
Energy-Efficient Financing Programs
You can apply for energy-efficient financing through a government-insured or conventional loan program. Some states even have programs for their residents, so it's a good idea to contact your state energy office to find out if your state does.
There are two types of energy-efficient
mortgages (EEMs): one for a new home and one for an existing home. With an EEM,
you can purchase or refinance a home that is already energy-efficient. Or you
can purchase or refinance a home that will become energy-efficient after energy
saving improvements are made. Most energy-efficient financing programs offer
both types of EEMs, as well as home improvement loans for making energy
efficiency upgrades to your existing home.
Here's an overview of some of the energy-efficient financing programs available. Each program is subject to change; therefore, you should contact a program directly for the most current, detailed information.
U.S. Department of Housing and Urban Development
Under the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Authority (FHA) insures mortgage and home improvement loans, through its approved lenders, for borrowers who would not otherwise qualify for conventional loans on affordable terms, such as some first-time home buyers and some residents of disadvantaged neighborhoods.
FHA Energy-Efficient Mortgage
FHA allows borrowers to finance the cost of adding energy-efficient improvements to new or existing homes as part of their FHA-insured purchase or refinancing mortgage.
This EEM can be used in conjunction with several other FHA-insured mortgages, including the 203(k) rehabilitation mortgage insurance described below.
FHA Section 203(k) Rehabilitation
When purchasing an energy-efficient home, an FHA-approved lender can stretch the borrower's debt-to-income ratio by 2 percent.
FHA Mortgage Increase for Solar Thermal Systems
The maximum loan limit under FHA's standard 203(b) or 203(k) property rehabilitation mortgage insurance can be exceeded by 20 percent if the home has or will have a passive or active solar heating system. The home must also have a 100 percent operational, conventional backup system.
FHA Title I Property Improvement Loan Insurance
FHA also insures home improvement loans, including those that will make a home more energy-efficient, for homeowners with FHA-insured mortgages. It features:
U.S. Department of Veterans Affairs
A VA refinancing loan may not exceed 90 percent of the home's appraised value plus the costs of the improvements.
Most of the national lenders who offer energy-efficient financing operate through one of the following programs.
ENERGY STAR® Mortgage
The program also encourages lenders to provide EEMs for certified ENERGY STAR® homes. An ENERGYSTAR® mortgage offers a minimum 2 percent stretch on a borrower's debt-to-income ratio, plus at least one additional incentive for borrowers. Incentives may include:
Fannie Mae encourages lenders to offer its EEM by providing incentives and specific criteria for those that it's willing to purchase from lenders. Both existing and new homes fall under this EEM.
Residential Energy Efficiency Improvement Loan
Fannie Mae is partnering with utility companies to provide loans to utility customers for the installation of energy-efficient home improvements. The loans feature:
Like Fannie Mae, Freddie Mac provides incentives and criteria, as well as flexible guidelines, for EEMs that it's willing to buy, which encourage lenders to offer them. However, the EEMs are limited to purchasing existing energy-efficient homes or those to be retrofitted or renovated for energy efficiency.
Energy Efficiency Mortgage
This EEM is available through utilities with E Seal certified programs. It can be used to finance the purchase of a new home with energy efficiency upgrades or to refinance an existing home while adding these improvements. It features:
Residential Financing Program
For energy-efficient home improvement loans, E Seal's program participates with Fannie Mae's Residential Energy Efficiency Improvement Loan program (see above).
When it comes to energy-efficient financingwhether you want to purchase, refinance, or remodel a homeit's best to work with lenders and/or real estate agents who are familiar with home energy ratings and program requirements. If you'd like a home energy rating report, it's also best to work with a certified energy rater. In all instances, it's always a good idea to ask for references and check companies with your local better business bureau.
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