What is an energy efficient mortgage? Is it right for you?


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That old home you’ve got your eye on might have loads of charm, but it’s also probably very energy inefficient.

Poor insulation and leaky windows can lead to higher heating bills that could add up to an extra month’s mortgage payment every year. Never mind that homes account for more than 20 percent of U.S. greenhouse emissions.

But if you finance your purchase with an energy efficient mortgage (EEM)—sometimes called a green mortgage—you could cover the costs of valuable upgrades before you move in, or afford a house already equipped with leading-edge efficiencies.

The benefits of an energy efficient mortgage

Energy efficient mortgages aren’t just for homebuyers. They’re also for homeowners who want to refinance and for sellers looking to improve their home’s market value.

The benefit to buyers comes in a couple different ways: EEMs help when purchasing homes that are already efficient, such as EnergyStar-certified buildings. Or they can be used for older properties that can be updated and remodeled with various efficiency improvements. In the latter case, they’re more properly referred to as energy improvement mortgages (EIMs).

EIMs let homebuyers add the cost of needed energy improvements into their mortgage without requiring a bigger down payment. EEMs help finance energy improvements by boosting debt-to-income ratios and allowing for larger loans to buy energy-efficient homes (which tend to be more expensive). Both types of mortgage are contingent on an inspection and home energy rating to assure the lender of probable monthly efficiency gains.

Who offers them?

Any mortgage program insured by the federal government offers energy efficient mortgages, which come in three main types: conventional, FHA and VA.

Conventional EEMs allow lenders to boost the borrower’s stated income by a dollar amount equal to the estimated energy savings of the home they’re buying or the improvements they’re making, boosting the size of the loan they can qualify for.

For FHA loans, EnergyStar rules dictate that the maximum amount of the portion of the mortgage allocated for efficiency upgrades can be the lesser of 5 percent of:

No additional down payment is required, and the FHA loan limits won’t interfere with the process of obtaining the EEM.

The EEM offered by the Veterans Administration, available to qualified military personnel, reservists and vets, caps energy improvements at $6,000. Upgrades covered by this and other loans might include solar heating systems, caulking and weather-stripping, furnace efficiency improvements, insulation, storm windows, heat pumps and more.

What do you need to qualify?

Anyone who wants to apply for an energy efficient mortgage will need have a home inspection performed by a professional who can assess the property’s compliance with U.S. Department of Energy standards.

The audit, which looks at existing or needed energy-saving features, assesses how much improvements will save in energy efficiency and estimates how much they’ll cost, is then shared with the lender before the loan is approved. The lender will use the inspection report to help decide how much the property will gain from the proposed efficiency improvements.

According to the U.S. Department of Housing and Urban Development, qualified home energy assessors must be certified as a Building Performance Institute Building Analyst Professional, Building Performance Institute Home Energy Professional Energy Auditor or Residential Energy Services Network Home Energy Rater.