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The Energy Efficient Mortgage – what a concept

29 January 2009 34 views One Comment
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Believe it or not, there is a program out there called the Energy Efficient Mortgage, or EEM for short. Not all lenders will recognize this, but this appears to be a federally backed program that helps buy homeowners and buyers finance and improve their home’s energy efficiency – which in turn boosts the assessed value of the home.

Basically, it rewards homeowners (or prospective homeowners) who have or will buy energy efficient homes by appraising them at a higher price. So a $250,000 appraised house becomes worth $260,000. That’s a difference of 4%, or $10,000 in this case. Taking a closer look at the numbers, the report estimates a $90 savings on energy bills. And according to documentation at mortgage giant Fannie Mae, it is possible to finance the energy efficient upgrades to the house in the mortgage itself.

The mortgage can be offered to one unit, owner occupied principle residences.

So, right now you’re intrigued, right?

A home qualifies for an EEM if it is rated by a certified energy rater. This rater will rate the efficiency of the home in comparison to what is known as a reference home. Your home must exceed the efficiency standard of the selected reference home to be considered. The rater will provide a lender report that includes all the relevant information for consideration in an EEM. Some of these figures you can expect to see are the estimate monthly savings on energy bills for that home, and the energy value of the efficiency measures taken in the home.

Older homes, or existing homes can be considered for the program (in other words, not just new homes qualify.) But older homes must be retrofitted or have energy efficient measures installed to make them beat the energy efficient ratings of the reference home. Basically, don’t count your home out just because it is older – as long as it beats the efficiency of the reference home, it might be considered.

With EEM, there is no minimum credit score. So in theory, people will poor credit may still qualify.

So…lets say that you are a prospective homebuyer, and you want to take advantage of this program. What happens in the process, and how is it different than a normal mortgage process? A lot happens behind the scenes, but this is the basic idea.

  1. First, go home shopping. When you find a home that you like, and you think is energy efficient, you call a certified energy rater.
  2. The rater inspects the house and prepares the energy report. If this is a brand new home, the builder provides this report. The report is sent to the prospective lender, or mortgage company (typically a bank).
  3. The bank gives the borrower an income credit for the energy savings on the home, as long as it qualifies. They also add the energy value to the appraised value of the home. Tax credits for energy efficiency are added to borrower income, which potentially increases the potential loan amount that can be approved. Energy rebates are also included in closing funds.
  4. The rest of the mortgage process is roughly the same.

So, here’s the bottom line: If you go with an EEM, you can potentially borrow more for a bigger or better house, and pay less in closing costs.

In a time when the economy is in the tank and you still need a new house, it might be a no brainer.

But what happens if the home you like isn’t energy efficient? Well, you may be able to convert it into an energy efficient home and qualify for an EEM as well. Plus, the costs incurred might be able to be (partially) financed! Here’s how it works:

  1. You select a home. Ideally, select a home that will not take a lot of work to become energy efficient.
  2. Contact an energy rater, and have them prepare an energy report. This report will give the current assessment of the home. Since there are shortcomings, he/she will recommend several measures that will improve the efficiency to exceed the reference home.
  3. Select what you want to do with the home (the improvements) and get with your bank to determine what the final loan amount will be. You might be able to roll some of the cost into the mortgage, depending on the cost. Whatever isn’t covered will go into escrow and come from your down payment.
  4. The contractors who make the improvements are paid out of escrow. Any additional amount left over from this will go into paying down principle of the loan.

So you see, it is in theory possible for nearly any home to qualify for an EEM. With a home that needs some work, however, it will cost more out of pocket – since essentially you are paying to bring the home up to standards.

What next?

Consult with your lender to see if they recognize or participate in this program. Larger metro areas (notable the San Antonio area) have such programs in place already, funded by Fannie Mae. Then consult with a energy efficiency rater to get the ball rolling.

Resources:

Fannie Mae EEM powerpoint (ppt) from 2004 : http://climatevision.gov/pdfs/homes_roundtable/desiderio.pdf

Find a certified rater in your area: http://www.resnet.us/directory/raters.aspx

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