Finding and Working with Green Lenders
Going green is not solely about helping the environment. In fact, with the increase in green mortgages across the United States, people are finding that going green means saving money and, in some cases, qualifying for a bigger loan on a bigger house. Finally, people are beginning to see that going green can help the environment and add green to your wallet.
Green mortgages, often referred to as Energy Efficient Mortgages (EEM) within the industry, are starting to gain exposure in many markets. Although they have been around since the 1970′s, recent energy cost increases and global consciousness about environmental issues have driven the once unknown products into the eye of the mainstream. The main driving force? Money. As is often the case with products and services, the power of the green mortgage was not fully exposed until the money saving aspects were explored. A note of caution: using a green mortgage can increase your borrowing power, allowing you to purchase a larger home with a bigger mortgage while using the same income and down payment you already have. Be careful not to get in too deep. Just because you can go bigger doesn’t mean you should.
A traditional mortgage is based on the borrower’s debt-to-income ratio. Most financial advisors agree that homebuyers should limit mortgage payments to a maximum of 28% of their gross income. This is a ratio I suggest you stick with, even if you are able to borrow more under a green mortgage. After all, having a bigger home with a higher debt-to-income ratio is not a good idea once the dust of the loan settles and you are stuck making higher monthly installment payments on the loan. Green mortgages are designed with the understanding that a more energy efficient home will end up costing the home owner less when it comes to monthly utilities. They consider the money saved from lower utility costs income, which is how the overall debt-to-income ratio is adjusted by going green.
To me, counting money you have not yet spent as increased income is a dangerous approach, nonetheless, it is the approach used by most green lenders and is quickly becoming the industry standard. There are other ways that green mortgages can save you money and improve the efficiency of your home. With the increased borrowing power of the mortgage, borrowers can roll the cost of energy efficiency improvements such as new windows or added insulation into their loan. A person can actually borrow up to 15 percent of the home’s overall value to spend on such energy improvements. The money from this portion of the loan is held in escrow until the actual costs of making the home more efficient are invoiced.
Locating a green mortgage
Some private companies such as Citibank and Bank of America are now providing green mortgage options. Some states such as New York, Kansas and Pennsylvania have their own versions as well. The details of their loans will differ slightly from Federally Insured options, so check with your local representative for details on their products. There are specific guidelines that govern the federal companies that offer green mortgages. Fannie Mae, Freddie Mac, The Federal Housing Administration (FHA) and the U.S. Department of Veteran Affairs (VA) all have a version of a green mortgage. You can visit their websites for more information; however, be aware that these loans can be difficult to find, even on their websites. It may be best to speak with a local representative to gain information quickly.
Here is some basic information to give you an idea of what is available. In their green mortgage program, The FHA program allows homeowners to finance energy efficiency improvements within the home loan. They will allow the borrower to add up to 5% of the property value up to $4,000 to the overall mortgage. In addition, they will often increase the loan ever further to cover such improvements as solar photovoltaic panels and home weatherization improvements.
As described earlier, some companies will allow borrowers to increase their debt-to-income ratio in order to allow for a larger mortgage offset by utility savings. Fannie Mae will allow up to a 2% increase in that ratio. In the case of an existing home which is already energy-efficient, homebuyers and/or refinancing homeowners can increase their mortgage amount by up to 5% of the home’s overall value.
One detail of the VA’s program is that those reservists, veterans, and military personnel who qualify can finance up to $3,000 of energy efficiency upgrades for straight cost return. If the upgrades are considered likely to create more savings than the cost of their installation, then borrowers can include up to $6,000 in the loan.
Energy Star Mortgage is an EEM program that was initiated by the Energy Programs Consortium, a nonprofit policy research group in Washington, D.C.. Their initial pilot program was launched in Maine in February, 2009 as a joint effort with the state of Maine housing agency. It has been a great success and so has now expanded to more markets. You can find out much more about this product at Energy Star’s Website.
The program itself was created to help homeowners minimize their energy costs. Most borrowers see energy savings of at least 20% as a result of the energy efficient improvements. As a partner in the industry, Energy Star Mortgages take into account all existing state energy efficiency guidelines and benefits.
Before you can take advantage of any EEM, you’ll have to find one, and make sure it is the best option for you. This may not be easy. Many lenders are reluctant to offer the products because in the past they have been hard to sell in the secondary mortgage market. This seems to be changing as more and more green mortgages are bought and sold. If you need help locating options for green mortgages in your area, try contacting your state housing financing authority or state energy office. There is also a lot of information on the website for the National Association of State Energy Officials.
Qualifying for a green mortgage
A newly constructed home that has been certified by the builder to meet specific energy guidelines will qualify a borrower and the property for most of the agencies and companies who offer green mortgages. If the building is not builder certified, a home rater can inspect the property and order a Home Energy Rating System (HERS) report. The report, in order to qualify a property and borrower, will have to show that the home meets all of the requirements set forth by the lending agency.
A HERS report will investigate the home’s windows, insulation, appliances, and balance the data with local climate information and utility rates for your area. The report itself will give suggestions for improvements or recommended upgrades and what their cost benefits will likely be. If the report cannot show that the upgrade will end up saving the borrower money on utilities, then the loan will not be approved.
Sam Rashkin, national director of Energy Star for homes – a division of the Environmental Protection Agency says “the energy savings will translate into more property value” for homes on the program. For example, a $200,000 home could receive an additional $11,000 in value if the HERS report certifies that the house is energy-efficient to applicable standards. Further incentive to consider a green mortgage is the fact that the Energy Policy Act will soon give tax credits to homeowners who actively conserve energy. What’s even better is that because mortgage interest payments are tax-deductible, an EEM is a great way to pay for your home improvement projects.
ABOUT THE AUTHOR
Andrew Morrison is the co-founder of Straw Bale Innovations, LLC, a company specializing in straw bale construction education and the proprietor of www.StrawBale.com. Andrew has a passion for straw bale construction that is matched only by his desire to teach his knowledge to others. For over 15 years, Andrew was a skilled, licensed general contractor with experience in designing and building both conventional and straw bale homes. In 2007 Andrew closed his contracting company to focus entirely on teaching workshops and consulting. You can learn more about his workshops at www.StrawBaleWorkshops.com and his consulting services at www.StrawBaleConsulting.com. Andrew received a BA degree from Hampshire College in 1995 for Glacial Geology. He also has a degree in construction technology form the College of the Redwoods.
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