OCR Document

Imagine a mortgage that would reward you with more buying power for purchasing an energy-efficient home. Or what if you could get a special mortgage to finance an energy-saving home improvement? In fact, energy-efficient mortgages, or EEMs, have been around for more than 20 years. Yet most people remain unaware of these products because they have been misunderstood and little marketed.

The EEM concept is based on common sense. After a homeowner's mortgage payment, his or her utility bill is usually the next largest housing-related expense. The money saved on energy bills frees up discretionary income, qualifying the borrower for a larger loan. Whereas traditional mortgages are calculated based on a person's debt-to-income ratio, the EEM also factors in savings associated with a building's efficiency. In addition to increasing the amount a person may borrow, the EEM also offers the convenience of folding the cost of efficiency improvements into the mortgage.

Despite their obvious value, however, these mortgage products remain underused. "Energy-efficient mortgages are the best kept secret in the mortgage industry." However, as costs for home heating and cooling skyrocket, consumer interest in EEMs is growing. For the potential benefits of EEMs for homeowners, as well as for homebuilders, real estate agents and mortgage brokers, it's time to get this secret out.

Consumer access to energy-efficient mortgages is dependent on primary mortgage companies offering and promoting them. For years, it was tough to find an EEM, partly because lenders had to underwrite the loans individually, which made processing them onerous. The good news is that Fannie Mae, one of the largest providers of EEMs; recently made changes to the program that make it compatible with the most common underwriting software. This facility should encourage more lenders to offer the mortgages as their benefits become widely understood, In addition, lenders in the secondary mortgage market - Fannie Mae, Freddie Mac, the Department of Housing and Urban Development and the Department of Veterans Affairs - all offer EEMs.

The key road block simply has been a lack of communications. To make EEMs more available and more known, homebuilders, lenders and real estate agents need to take time to understand the concept and to educate customers about the benefits and availability. Consumers also need to seek out information and ask about these options.

Energy-efficient mortgages can be used to finance new homes or to refinance existing homes to pay for efficiency improvements or renewable energy system installations. For instance, on-site renewable energy systems like photovoltaic arrays, wind turbines and geothermal heat pumps are eligible for financing through an EEM.

The loans differ slightly, depending on how they are used.

The goal of the EEM is to encourage purchasers to select and easily finance energy-efficient new homes. Because many homebuyers have little extra cash for upgrades to a house after closing, the EEM allows the lender to increase the home's appraised value by the amount of the estimated energy savings and allows the buyer to finance the upgrades and pay for them as part of the mortgage cost. Adjustments to the appraisal are capped at 5 percent of the house's value.

Energy-improvement mortgages, or ElMs, are a specific type of EEM to finance energy upgrades for the borrower's existing home or one the borrower wants to purchase and upgrade through a new mortgage loan using monthly energy savings. An ElM will allow the homeowner to finance 100 percent of the energy-efficiency upgrades - up to 15 percent of the value of the home.

The goal of the ElM is to encourage a homebuyer or homeowner to retrofit the home to be energy efficient. The ElM allows the consumer to finance improvements over the term of the mortgage and eliminate large up front costs.

Both of these EEM products can be used for one-unit, single-family, owner-occupied principal residences and condominiums.

The process begins when a person selects an energy-efficient home to purchase or an energy improvement to make.

For buyers of newly constructed efficient homes, the first step is to obtain from the builder an energy report for the home and share it with the EEM lender. Based on the energy savings expected to result from the efficiency features, the lender will credit the borrower towards his or her disposable income and add this dollar value to the appraised value of the home. Applicable tax credits will also be added to the borrower's income, and any rebates will be included in funds available for the house closing.

The process for those wishing to finance an existing house purchase or an energy upgrade is similar. In this case, however, the borrower must contract with a home energy rater who will prepare an energy report recommending cost-effective efficiency measures. Once the borrower has selected the efficiency measures to take and determines with the lender the final loan amount, the loop closes, with funds reserved for the efficiency measures placed into escrow. Once the upgrades are installed, the efficiency contractor is paid from the escrow, with any remaining balance applied to the mortgage principal.

To qualify for an EEM, the borrower must have a home energy rating performed by a certified home energy rater. Home energy raters, accredited by the nonprofit Residential Energy Services Network, provide the third-party verification of energy savings the mortgage industry requires for EEMs. Like a vehicle's MPG sticker, a home energy rating makes it possible to compare houses according to a standard scale.

Home energy ratings are required to finance both new and existing homes. In new homes, ratings verify the energy performance required for EEMs, as well as the Environmental Protection Agency's ENERGY STAR homes program and energy-code compliance. A home purchaser or owner of an existing home who wants to upgrade the home's energy efficiency can use the energy rating report to pinpoint cost-effective improvements. As of July 1, the Home Energy Rating Index used to calculate an EEM was expanded to include all on-site renewable power generation. This expansion adds credit in the calculation of the index for homes using on-site power generation. For more information about home energy ratings or to find a certified home energy rater, visit RESNET's website at www.resnet.us.

Renewed interest in reducing utility bills through energy efficiency and clean, renewable energy may help the energy-efficient mortgage finally take its place as a widely available, competitive financing mechanism. In addition to the consumers who stand to benefit from EEMs, builders, real estate agents and lenders can differentiate themselves and help buyers finance energy-saving upgrades by offering these mortgage products.

Home purchasers and owners can help encourage energy-efficient mortgages by making sure lenders know that such efficiency-financing options are important to them. They should ask about availability and look for a broker with experience with EEMs. .

Federal Citizens Center: Energy Star, U.S. Environment

www. energystar.gov

Residential Energy Services

www.resnet.us

A sample of energy-efficient mortgage providers.

Countrywide Home Loans Inc.: www.countrywide.com

Fannie Mae: www.fanniemae.com

Freddie Mac: www.freddiemac.com

Indigo Financial Group: www.energystarloans.com U.S. Department of Housing and Urban Development: www.hud.gov

U.S. Department of Veterans Affairs: www.va.gov

Alliance to Save Energy offers an overview of energy-efficiency financing, including a guide to new federal efficiency tax credits. Click on Consumers: www.ase.org

Database of State Incentives for Renewable Energy details state-by-state financial and regulatory incentives for renewable energy technologies: www.dsireusa.org "

Solar Energy Industries Association Guide to Federal Tax Incentives for Solar Energy: www.seia.org/manualdownload.php

U.S: Department of Energy's Office of Energy-Efficiency and Renewable Energy offers financing information for consumers, as well as other groups: wwwl.eere.energy.gov/financing