What’s a green mortgage and where can you find one?
What’s a green mortgage and where can you find one? That’s a loaded question these days. Unfortunately, there is no verifiable, transparent answer. Web searches regarding the subject of green mortgages seem to be caught in a time warp, with dated information (up to a decade ago) from the old Fannie Mae and FHA Energy Efficient Mortgage (EEM) guidelines still abundantly popping up; nothing new, and rather disappointing.
Energy and building innovation continues to evolve rapidly. Yet we are patiently (or not) waiting for the financial industry; consistently trailing behind in adaption to high-performance lending practices that incentivize high-performance building markets. Multiple websites with links to information regarding energy mortgages date back to 2001. Or worse, the green links send you to conventional lending websites that don’t have anything to do with green lending, and offer the same generic loan programs. What about financing that actually rewards those that are doing the right thing?
For most Americans trying to find a green mortgage company who gets it (knowledgeable and passionate about the Built Environment) and gives it (offers incentives and recognizes green premium value) the process can be discouraging. Finding a lender that walks the talk and demonstrates a strong sense of corporate culture and environmental leadership is often an anomaly.
A good example of financial market non-adaption in the lending industry is Green Energy Money’s E-Book for Residential Homes, first published in 2011. This book is still relevant today, due to the slow evolution and traction of green financing mechanisms. The government has tried to jumpstart and lead financial markets with tax incentives and energy efficient mortgages (EEMs), but many challenges have stalled or ended in market failures.
Fannie Mae did offer the Energy Efficient Mortgage (EEM) loan until several years ago. The guidelines allowed expanded debt ratios of 2-3%; you could qualify for between $4k – $6k more for upgrades. However, the maximum loan increase was capped at $8000 for energy efficient features. They even adopted an appraised value, dollar amount per energy savings formula; $15 for every dollar of energy saved ($1000) (*$15=$15,000). The formula didn’t work due to a guideline that allowed either the $8000 maximum or the appraised value, whichever was lower; and since energy upgrades cost more than they do today. This formula could be an acceptable baseline and standard calculation model; GEM’s Free IPV Calculator reflects an estimated present value of $1000 energy savings @ 4% is $13,762.
FHA still offers EEM programs, but lender participation has been extremely low due to the labor intensity involved in processing and limited number of approved builder-project managers. Few lenders have been willing to take on the additional construction risk and processing flow. The 203k streamlined loan product (existing homes only, up to $35k) allows up to 110% of costs to be applied to the loan and many lenders have opted to use this program as an EEM because it is easier to qualify and process. In good news, FHA has changed their guidelines to *allow solar financing, up to 20% over the statutory loan limit for solar upgrades. Check new FHA handbook for guidelines. *(available September 2015)
These guidelines have worked well in real estate markets where there is green inventory and demand. These conventional programs and guidelines should continue to work as new green premium inventory replaces old, antiquated brown discounted properties. In other words, many homebuyers are reacting positively to high-performance building and are willing to pay more and absorb the extra costs. Green premiums are becoming more prevalent in many cities; and accepted as common practice as consumers adapt to positive economic attributes as well as increased security, better durability, comfort, lower operating costs associated with high-performance buildings.
Other alternative financing solutions such as self-funding options might be more attractive for some owners. . You should always consult your tax attorney and/or accountant or CPA when considering alternative financing with existing investment portfolio retirement accounts or other real estate owned.
- Leverage by borrowing against stocks, bonds or even CDs. This can be a good move if these instruments are performing well
- Borrow against 401k-restrictions do apply
- Restructure mortgage debt with other properties, i.e., existing homes, rentals, etc.; this option requires refinancing or taking out home-improvement or home equity loan
- PACE (Property Accessed Clean Energy) – PACE Programs are being approved and offered in some municipalities and states, states, mostly in California. Due to the extreme lack of transparency around financing terms, a separate chart on PACE benefits and potential drawbacks are listed below (some of these are applicable for solar financing programs as well).
But still, the question remains, what is the true definition of a green mortgage; how is it different from a conventional loan;
and lastly where’s the green in a green mortgage?