Right and Wrong Info About Energy Efficient Mortgages

A recent article in RealtyBizNews.com attempted to give an overview of consumer options for energy efficient (green) mortgages (known as EEMs), and their rising popularity. Alas, like many articles on the subject of green mortgages, it’s riddled with inaccuracies.

First, the article suggests that EEMs are rising in popularity. Actually, EEMs are not that popular. According to a more accurate article on Efficiency.org, Energy Efficient Mortgages are Better in Theory Than in Practice, “EEMs have not achieved more than a toe hold in the market, and the numbers continue to fall.’’ Why? EEMs are available both for existing green upgrades and at the point of sale, when a buyer is purchasing a home. There is little incentive for lenders, real estate agents or buyers to go through the extra steps and paperwork necessary to get the financing for energy efficiency improvements at the point of sale. Homebuyers typically don’t think about the energy costs of a home when they are buying one, and the realtors don’t receive the commissions on the added value of the EEM that can justify the work involved.

Second, the article states, “On FHA loans, the cost of improvements usually can’t exceed 5 percent of the property’s value, but is capped at $8,000.” Actually, the cap is regionally driven and many high-cost regions will allow the EEM loan amounts as high as the mid to high $20,000 range.  For the most part, EEMs have focused on weatherization – average loan amounts nationally account for approximately $10,000 in EEM upgrade loan allowances. However, the FHA EEM is calculated based on regional statutory loan limits and median sales prices.  For example, in Austin, Texas the maximum loan amount for an FHA EEM is approximately $14,000; but in certain Boston regions the maximum EEM loan amount would be $23,000.

Third, the article states that “Fannie Mae, the Federal Housing Administration, and the Veterans Administration offer loan programs that include energy-efficient mortgages.” Actually, Fannie Mae does not offer the EEM anymore; that program has been defunct for years. However, their guidelines do allow up to 10 percent of the value of the property to be added to the appraisal valuation—although most appraisers aren’t able to add a green premium—hence the need for GEM’s Green Appraisal quantification and certified green appraiser training curriculum.

An alternative FHA energy upgrade funding resource that is largely overlooked in media and green building markets is the FHA 203K retrofit program. The FHA 203k standard loan allows structural upgrades and up to 6 months to complete and is capped at the maximum regional loan amount.  The 203k streamline allows cosmetic or energy upgrades and up to 120 days to complete. This program allows up to $35,000 for improvements, and can be combined with the EEM to increase the loan amount, i.e., – $35,000 203k + $14,000 EEM = $49,000.

In the case above, if the owner was purchasing a property within the loan limit restrictions, they would only be required to provide a 3.5% down payment, making the home very affordable for first-time or low-income homeowner markets.  However, there are several downsides to the programs:

  1. The 203k loan limit does not allow borrowers to exceed the regional statutory loan limit and can be prohibitive in many regions. An example would be:
    • Purchase price = $303,000 (maximum FHA loan limit in Austin)
    • Cost of energy upgrade = $45,000

    In this case a building owner would be limited in funding, since the costs exceed the maximum allowable loan limit of $303,000.  They would be able to fund only the EEM loan increase of $14,000, which does allow the loan increase to be over the maximum FHA statutory loan limit. Confusing, yes!  This is why most lenders back off these types of loans due to the complex calculation loan limit requirements.

  2. Mortgage Insurance Premiums (MIP is FHA’s version of private mortgage insurance, PMI, which guarantees the lender’s risk in case of default) have more than doubled in the past few years and is now required to be paid for the life of the loan; therefore, building owners who have equity or at least 20% down payment would find these programs to be cost-payment prohibitive.
  3. The 203k program criteria and documentation process is considered too labor intensive by most lenders, and contractors and realtors complain about the process slowing down their transactions and closing times.
  4. In most cases a high-performance retrofit and construction project that incorporates a deep building envelope upgrade and renewable energy equipment won’t realize enough funding to cover the costs with the 203k FHA programs. It costs much more than a few thousand dollars to build a high-performance home or to fund a deep retrofit on an existing home. High-performance building costs can range dramatically, depending on regional labor costs, state tax offsets and rebate programs, etc.  In most cases and regions the average cost of a high-performance retrofit may average around $50-$75k. But when you consider the average cost of upgrading a kitchen can be similar in price, it’s a no brainer if it saves you hundreds of dollars a month on your utility bill.

The bottom line is that neither the EEM nor the FHA 203k program is very effective at stimulating high performance energy efficiency upgrades. Ergo, the marketplace needs financing programs that fund high-performance home improvements, not just weatherization or shallow energy efficiency measures. For more on this topic, see Chapter 3 of my eBook, Green Energy Money: Financial Solutions to Power a Sustainable Future.