Green Mortgages

What is a green mortgage?

Here are some responses that I’ve got to that question.

• “How can a mortgage be green? Are all of the loan documents printed on recycled paper?
• “Do you have to have one of those houses with a grass roof?”
• “Can I move into a home that is completely off the grid, i.e., no electricity, gas or water?

The fact is that many people are becoming more interested in reducing their global footprint, yet they are not aware of what green mortgage options are currently available.

A green mortgage is one of many supplemental incentives that can added to a mortgage program so that the buyer of a home can enhance the home’s energy efficiency through cost-effective, energy-saving measures.

To get an energy efficient mortgage a borrower typically has to have a home energy rater conduct a home energy rating before financing is approved. This rating verifies for the lender that the home is energy-efficient.

Some typical improvements that are made to increase a home’s energy efficiency include, but are not limited to:

• solar heating systems, including solar systems for heating water for domestic use
• solar cooling systems
• caulking and weather-stripping
• furnace efficiency modifications limited to replacement burners, boilers, or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system, and electrical or mechanical furnace ignition systems which replace standing gas pilot lights
• clock thermostats
• new or additional ceiling, attic, wall and floor insulation
• water heater insulation
• storm windows and/or doors, including thermal windows and/or doors
• heat pumps, and
• vapor barriers.

Below is a summary of some of the green mortgage programs that are more readily available.

Conventional Energy Efficient Mortgages

Conventional Energy Efficient Mortgages allow a lender to increase the borrower’s income by a dollar amount equal to the estimated energy savings created by the energy efficient measures. It is available through lenders who sell their loans to Fannie Mae and Freddie Mac. The Fannie Mae loan also adjusts the value of the home to reflect the value of the energy efficiency measures. More information on green mortgage programs.

VA Energy Efficient Mortgages

VA offers incentives to qualified military personnel, reservists and veterans for energy improvements when purchasing or refinancing an existing home. VA lists some of its The VA Energy Efficient Mortgage program caps energy improvements at $3,000–$6,000. More information on VA’s energy efficient mortgage program.

FHA Energy Efficient Mortgages

FHA’s Energy Efficient Mortgage program allows a borrower to finance 100% of the costs (see below) related to the property improvements to make a house more energy efficient and is explained in detail in mortgagee letter 2005-21.

This mortgagee letter consolidates and clarifies existing FHA green policies and describes the enhancements that were made to make them more widely available. FHA’s program can be used with standard FHA loans (purchase and refinance), rehabilitation (203(k)) loans, condo financing and FHA mortgages in disaster areas.

The crux of the program is a cost effective “energy package” in which the cost of the improvements, including maintenance, is less than the present value of the energy saved over the life of those improvements. In other words, it has to makes sense and save more money than it costs.

If a borrower wants to take advantage of this program, he can agree to recommendations and analysis performed by a qualified home rater who will prepare a report that provides an estimate of both the costs of the improvements and the expected energy savings. The energy package may be added to the loan amount and the lender underwrites the loan as if the associated cost did not exist.

The one caveat is that the dollar amount cannot exceed 5% of the property’s value (not to exceed $8000) or $4000, whichever is greater. Further, at least $4000 of the cost of the energy package can be financed if the costs exceed $4000.

So, you’re interested in a green mortgage and reducing the energy consumption in your house?

The good news is the federal government wants to help you. HUD’s Energy Action Plan wants Energy Efficient Mortgages to be a priority loan product.

Call your lender or your favorite real estate agent to find out how you can go green with your mortgage.