Energy Mortgage Stretches Buying Power

Cooling temperatures around Capitol Hill make me think of ways to get the old home place ready for the winter months in the fickle Mid-Atlantic area and that usually means spending some money on insulation, caulking and the usual home maintenance that keeps the cold air out and warm air in.

There's a mortgage on the market that could be worth a look to help either buy an energy efficient house (or make the one you want to purchase into an energy efficient home). The energy efficient mortgage (EEM) was designed by the U.S. Housing and Urban Development and can also be used to remodel a house into a more energy efficient unit, saving you monthly payments to the power company.

The Residential Energy Services Network (RESN), created by the National Association of State Energy Officials and Energy Rated Homes of America, was established to develop a national market for home energy rating systems and energy efficient mortgages. RESN notes EEM's benefit borrowers in several ways:


The estimated energy savings are added to the borrower's income, allowing him or her to qualify for a higher mortgage amount.

With more borrowing power, the EEM then allows borrowers to roll over the costs of energy improvements into the borrowed amount. All the costs of the energy improvements (up to 15 percent of the value of the home), is allowed to be financed, thus reserving a borrower's cash for more immediate, move-in costs.

The value of the home is adjusted by the value of the energy efficient improvements.
If the house is already energy efficient, then the borrower can use the program to stretch his buying power. Under an EEM, the traditional debt-to-income qualifying ratios are expanded. The idea being that if you're paying less for monthly energy costs, you can afford more for your mortgage payment.

The Federal Citizen Information Center (FCIC), which is the information/publishing arm of the U.S. General Services Administration, has a great online guide about how the program works.

For instance, borrowers with a monthly income of $5,000 could increase their buying power by nearly $16,000 using an EEM (based on a 30-year fixed rate mortgage at 7.5 percent interest rate).

The group lays out a step-by-step guide to acquiring an EEM:


Find the target house, then inform your lender that you want an Energy Efficient Mortgage.

Have a Home Energy Rating Systems review done on the property.
A HERS rating is conducted by a trained energy rater with a cost between $100 to $300 (which can be negotiated between the buyer and seller or financed with the mortgage). The rating ranges from 1 to 100. The higher the score the more energy efficient the house. The score rates the following:


Recommended cost-effective energy upgrades.

Estimates of the cost, annual savings, and useful life of upgrades.

Improved Rating Score after the installation of recommended upgrades.

Estimated annual total energy cost for the existing home before and after upgrades.

The HERS rating is sent to the lender.

The lender evaluates the rating
At this point, one of two things can happen.

The home can qualify for energy improvements, thus the lender puts the extra funds into escrow for the improvements, you close on the house, move in, and then the improvements are completed, paid for out of the escrow.

Or if the house already qualifies as an energy efficient home, then your debt-to-income rations can be stretched if needed, you close on the house and move in.

There are several versions of the EEM, some even allowing 100 percent loan to value financing (i.e., zero down payment financing). Check with your loan professional for a list of programs that meet the EEM criteria.

Published: November 4, 2005