Financing to Make Your Home Energy-Efficient
Guide to Green Mortgages: Requirements, Loan Types & More
Most people who want to "go green" have selfless motives: Cutting back on pollution, saving natural resources and making the world a cleaner, healthier place. But as a homeowner, an energy-efficient dwelling can also make sense for the pocketbook. In fact, an eco-friendly home can be such a great investment that many lenders are getting in on the business by offering "green mortgages." These loans — offered by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and banks — are specifically designed to finance energy-efficient homes. If you shop around for the right mortgage and use the money wisely, you may end up saving a significant amount of money while doing your part to protect the environment.
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Types of Green Mortgages
There are three basic types of green mortgages: FHA, VA, and conventional.
FHA's Energy-Efficient Mortgage
How it works
An EEM loan from the FHA can help you afford energy-wise improvements to your existing home or a home you want to buy or build. With this type of loan, you only have to be approved for the loan amount necessary to purchase or refinance your home, not for the extra costs of making that home energy efficient. For example, if you're buying a home for $200,000 and plan to spend $10,000 on green improvements, you'll only need to qualify for a $200,000 loan. The size of the down payment will stay the same, too. Like all FHA mortgages, the agency's energy-efficient mortgage is insured by the government, which encourages banks to make loans at attractive interest rates and low down payments to people who may not otherwise qualify. For more information on FHA loans, see MoneyGeek's FHA hub.
Who's eligible to apply
Anyone who is eligible for an FHA loan is also eligible for an FHA EEM loan. Contrary to popular belief, you don't have to be a first-time homebuyer to qualify for an FHA loan. Before the bank will approve the loan, the home must be inspected by a certified energy specialist who will confirm that any energy-efficient improvements will save more money than they cost.
You will have to provide pay stubs and other financial information to the lender to confirm you have a steady source of income, a credit score of at least 580 and proof of U.S. citizenship. If your credit score is between 500 and 579, you may still qualify for a loan, but you'll likely have to pay 10 percent down instead of 3.5 percent.
What it covers
There's a limit to the cost of energy improvements the FHA is willing to cover. The maximum amount of the portion of the EEM for energy-efficient improvements is the lesser of 5 percent of:
- The value of the property, or
- 115 percent of the median area price of a single family dwelling, or
- 150 percent of the conforming Freddie Mac limit.
VA's Energy-Efficient Mortgage
How it works
This program helps veterans who want to make energy improvements to an existing home they're planning to purchase. Potential borrowers should discuss this option with the lender up front.
Who's eligible to apply
VA loans are available to qualified veterans, active military personnel and reservists. For more, see MoneyGeek's hub on VA loans.
What it covers
Depending on your situation, the VA will cap its coverage for energy improvements at $3,000 to $6,000.
How it works
Fannie Mae and some other conventional lenders offer EEMs that make it easier for borrowers to afford energy-efficient housing. In EEMs, lenders take into account potential energy savings when deciding the size of a loan. The house that's involved will require inspection by an expert who can give it a HERS rating and give you specific suggestions for improvement. To qualify for an EEM, projected energy savings would have to make up for the costs of the upgrades.
Note that Freddie Mac doesn't have an official EEM program, but it does let borrowers include the cost of energy upgrades in the loan. If you plan to make your house more energy-efficient, Freddie Mac will increase the usual allowable debt-to-income ratio.
Who's eligible to apply
Anyone who is eligible for a conventional mortgage is also eligible for an EEM. For more information on conventional loans, see the MoneyGeek Conventional Loans hub.
What it covers
If you're looking to add energy upgrades to a home you're buying, a HomeStyle Energy Mortgage from Fannie Mae will finance it as long as improvements don't exceed 15 percent of the expected value of the house. You can finance up to $3,500 for weatherization or water-efficiency upgrades without getting the house inspected.
Energy-Efficient vs. Energy-Improvement Mortgages
There are two basic type of mortgages that can help consumers transition to green housing: An energy-efficient mortgage, or EEM, and an energy-improvement mortgage, or EIM.
An energy-efficient mortgage, which is generally rolled into a primary mortgage so there is only one monthly payment, can help you purchase a home you plan to make greener. The lender will take future energy savings into account when determining the size of the loan. In other words, you may be able to get a larger loan — and a more valuable house — than you would with a regular mortgage without requiring a larger down payment.
An energy-improvement mortgage can help you pay for eco-friendly improvements to your existing home, perhaps including new windows, insulation or an upgrade to your heating and cooling system. If you already have a mortgage, the lender can increase the loan amount to cover the costs of your energy upgrade. The lender repays the borrower for expenses from the improvements from an escrow account. This will increase your monthly mortgage payment, but you may save money overall through lower energy bills.
How Do Green Mortgages Differ from Regular Mortgages?
A green mortgage really isn't much different from a regular loan. You'll likely have the same interest rates, and of course, you'll still have to make monthly payments. However, the lender may agree to give you a larger loan to cover the costs of the upgrades. Say, for example, you're looking to get an FHA loan for a $200,000 home. If you took out an EEM to cover an extra $10,000 in improvements, the size of the mortgage, after your down payment, would be about $201,600.
If you bought the house as is with a regular FHA loan, the mortgage would be $192,000. With a 30-year fixed mortgage at an interest rate of 5.5 percent, that would add up to a monthly payment of $1,145 for the EEM and $1,090 for the regular mortgage. That's an extra $55 each month, which should be more than covered by savings from your green improvements.
You don't have to get an official green mortgage to upgrade a home, whether it's your own home or a house you're buying. As Dakota Gale, branch manager of Green Mortgage Northwest in Portland, Oregon, explains, many people use "rehab" loans from credit unions to refurbish their homes.
When purchasing a home, many people simply include the costs of planned improvements in the existing mortgage without the extra complication of a green mortgage.
They'll have to qualify for the full value of the mortgage, but most borrowers can manage that. Gale adds that many states and cities have programs specifically designed to give homeowners loans to improve their home's energy efficiency.
Qualifying for a Green Mortgage
Qualifying for a green mortgage is essentially the same as qualifying for a regular mortgage. The lender will still evaluate your credit history and your income. The only difference is the extra cost of energy upgrades won't be considered in the qualification process.
Say you're looking at a house that would require a $200,000 mortgage. If you planned to add $10,000 worth of energy improvements through a green mortgage, you would only have to qualify for a $200,000 mortgage, not $210,000.
Lenders treat new energy-efficient homes like any other home. They'll look at your credit history, income, and overall ability to pay without any consideration of the money you'll save on energy bills.
If you're buying an existing home and want to make it greener through an EEM, you'll have to have the home evaluated to get a HERS rating. You'll also have to meet the standard qualifications for the basic mortgage.
Three Green Home Options: Build, Buy or Improve
There are three ways to end up in a green home. The simplest approach is to buy an existing green house, although it will take some research to know for sure if the house is as efficient as advertised. Or you can have a new house built that fulfills all of your green dreams. For most people, the least expensive way to achieving a green house is to fix, adjust and improve the house they already live in. In all cases, you'll likely need financing to cover the costs.
Building a New Green Home
If you're starting from scratch, you'll want to be energy-conscious from the very beginning.
- Start by finding a local green builder who has partnered with Energy Star. These builders are already well-versed in the latest eco-friendly building techniques.
- Similarly, shop for products with the Conventional Loans label. This indicates an EPA-certified ability to conserve energy.
- Buy products with the WaterSense label. WaterSense is an EPA partnership program where approved products have been independently certified to save water.
- Consider using highly reflective roof paint or shingles. These options absorb less heat, and can therefore, cut air conditioning costs.
- Recycle leftover scraps of metal and other materials. Recycling options vary from state to state.
- Eliminate ozone depleting substances from the construction process.
- For insulation, use materials with the recommended R-value, or thermal resistance, that corresponds best with your climate and heating system.
- Maximize the use of natural light through windows and skylights.
- Consider home solar panels, especially if you live in a place like the southwest, with a lot of sunlight.
- Consider planting dense evergreens and shrubs. They can naturally create shade in the summer but still allow heat in during the winter.
Buying a New Green Home
Lots of houses have "green" labels or certifications, but these labels aren't created equal. Companies and organizations providing these labels don't always rely on the same standards, and some use the term "green" extremely loosely. The U.S. Green Building Council is one of the most widely known and recognized authorities on energy-efficient housing. If you can find a house that carries the council's LEED certification, you can be confident you're buying a truly green house. Likewise, a house certified by Energy Star is up to 30 percent more efficient than a typical house.
If a home hasn't been certified by a reputable organization, you can still verify its green bonafides by having an inspector give you a Home Energy Rating Standard score, also known as HERS. A HERS score covers the aspects of a house that have the most impact on efficiency, including the thickness of walls, the integrity of doors and windows and the quality of the water heater and heating and cooling systems. The lower the score, the more efficient the house. Typically, a new home scores a 100 on the HERS scale, according to the Residential Energy Services Network. If you're buying an older home, you can expect a rating of about 130. A truly energy-efficient home will generally have a HERS rating of 70 or less. A house with a HERS rating of 70 will use 30 percent less energy than a typical new house.
Making Your Existing Home 'Green'
If you're concerned your home may not be as energy-efficient as it could be, you can get an efficiency audit from an Energy Star certified inspector. Among other things, the inspector will likely conduct a blower door test to check the air-tightness of the house. If the test detects significant air leaks, you can discuss possible solutions with your contractor. You may need new insulation, weather-stripping or duct work. See below for quick ways to green your home.
Green homes not only are better for the environment but are cost-effective. Although benefits can vary widely from house to house, the U.S. Green Building Council estimates energy-efficient buildings can, on average, cut carbon emissions by about one-third while reducing energy use by about one-fourth. Researchers at the University of California at Berkeley recently studied 11 homes in northern California that had been significantly retrofitted to improve efficiency. One house reduced its energy use by 96 percent, while the average savings of all 11 homes was 43 percent. Considering the average U.S. household spends roughly $1,400 each year on electricity, savings can really add up. Energy-efficient homes also have a higher resale value.
An energy-efficient home can also pay off in other ways, including tax credits and rebates at the local, state and federal level. The Energy.gov site has a searchable database with information on specific tax credits in your area. You can get a 10 percent credit on federal income taxes for any Energy Star rated purchases, including central air conditioning, insulation, roof, water heaters, windows, doors and skylights, in 2015 or 2016. This credit only applies if you're buying or improving an existing home, not if you're building a new home, and it can't be used on rental properties.
Many local governments also offer rebates for energy-efficient purchases. For example, the Los Angeles Department of Water and Power offers rebates of up to $1,000 for homeowners who upgrade old pumps for in-ground pools. Con Edison, the energy company covering most of New York City, offers cash rebates for customers who upgrade their heating and cooling systems, including up to $1,000 for a new water boiler. You can search for rebates and other special offers by zip code here.
9 Quick Ways to Green Your Home
Here are some simple things you can do to make your more home more energy-efficient and less wasteful:
- Install LED lights, which last longer and waste less energy than incandescent or fluorescent bulbs.
- Use motion sensors to turn lights on and off rather than traditional light switches. This can also save on energy.
- Turn the thermostat down at night and when you leave the house.
- Unplug your computer and appliances when you're not using them.
- Use rechargeable batteries.
- Fix leaks inside and out.
- Wash your clothes in cold water.
- Leave grass clippings on the lawn rather than bagging them.
- Shop for products with the WaterSense and Energy Star label.
Common Questions and Answers About Green Mortgages
Dakota Gale is a mechanical engineer who shifted gears to provide energy-efficient financing services. His company, Green Mortgage Northwest, has helped thousands of buyers in Oregon and Washington with their sustainable financing needs.
What are the advantages of an energy-efficient mortgage?
In the right situation, an EEM can help people live in a more efficient house without spending any more of their own money. They end up saving some money, but the added comfort can be the biggest benefit.
Why aren't more people using energy-efficient mortgages?
They've been around forever, but they come in and out of fashion. Most people don't know about EEMs, and a lot of lenders don't know how to do them. The borrower has to ask for it, and the lender has to have enough data points to know that it makes sense. Also, it's a more complex loan, and you have to get an appraisal of the house to get the initial HERS rating.
Who would be a good candidate for an EEM?
You have to be starting with a house with a poor HERS rating. And it helps if you have big plans. The extra complexity of a green mortgage would make sense if you have a large, expensive project in mind.
What kind of credit score would I need to get an EEM?
Green mortgages generally have the same credit score requirements as a conventional or a FHA mortgage. While it's possible to qualify for an FHA mortgage with a credit score of 580 or even lower, very few banks will accept a score lower than 600.
What are the other options for financing a greener house?
Many cities and states across the country have set up programs to encourage people to make their homes more energy-efficient, such as Clean Energy Works Oregon, for example. They'll loan out up to $20,000 for energy improvements, which will pay for a huge chunk of what you'd want to do, whether it's insulation or a new HVAC system. You don't have to have a ton of equity in your home, and the approval process is a lot easier than for a mortgage.
How can people find such programs in their area?
Look online, or ask a contractor. Most local contractors know about the options.
Can I get an energy-efficient mortgage as part of a refinance?
Yes. If you want to refinance the home you're living in, you may be able to get extra money for energy upgrades. Also keep in mind that any credit unions offer "rehab" loans that can be used for any sort of home improvement, whether it's a new mother-in-law apartment or upgrades to efficiency.
Are there some energy improvements that generally aren't worth the cost?
New windows cost a lot but generally have a very small impact on energy use. You're much more likely to get your money's worth on new insulation.
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