California Center for Sustainable Energy

Loans help where it matters, at the bottom line

While the California housing market remains distressed, those who are in the position to buy or refinance can add value to their home and save on future energy costs by taking advantage of under-used mortgage programs that support residential energy efficiency. Society benefits as well, because energy-efficient homes cut greenhouse gas emissions.

The lending options, called energy-efficient mortgages (EEMs), are available for purchasing a new or existing home or refinancing and are “one of the best kept secrets in real estate,” according to home energy expert Jana Maddux, program manager for the California Home Energy Efficiency Rating Services ( CHEERS) headquartered in Huntington Beach, Calif. She was among the panelists at a recent EEM workshop held at CCSE.

Although EEMs have been around for decades, lenders are often put off by the extra paperwork, but a persistent broker or informed buyer can often wrap one into a first mortgage if the proposed energy upgrades meet program qualifications. With an EEM, even borrowers with modest incomes can qualify for a larger loan, pay less overall each month and increase their home’s comfort and resale value, Maddux said.

Basically, an EEM incorporates cost-effective, energy-saving upgrades into a single home loan without increasing the down payment. It could allow a buyer to purchase a higher quality new home or a homeowner to finance much-needed energy improvements. Monthly mortgage payments increase but the raise is offset by on-going lower utility costs. In addition, the cost of the energy improvements is tax-deductible, because they are included in the mortgage.

EEMs are available through mortgage programs offered by the Federal Housing Administration and the Veterans Administration and may be offered by Freddie Mac and Fannie Mae later this year. They require a home energy rating report to provide the lender with the estimated monthly energy savings and the value of the energy efficiency measures — known as the energy savings value.

A CHEERS rating can determine a home’s efficiency by inspecting its energy characteristics, such as wall and ceiling insulation levels, window ratings, heating and cooling system condition and building envelope integrity. The report, which costs $500 to $1,000, also recommends energy improvements, estimates upgrade costs, determines annual savings and projects an improved rating score. A second phase of rating standards due to be put into effect later this year will establish a larger-scope, whole-house energy inspection process, according to workshop panelist Jennifer Green, CCSE’s local governments program manager and a HERS rater.

With 75 percent of the residences in California built prior to 1978, when the state first established building codes for energy efficiency requirements, the majority of used homes for sale today do not meet current construction standards, Green said.

The benefits and terms of EEMs vary widely depending on the lending source, according workshop panelist Jeff Bricmont of Lighthouse Capital Group, a mortgage brokerage firm located in Long Beach, Calif. He outlined the terms of several EEM packages, highlighting their offerings and major differences.

A conventional EEM with Fannie Mae or Freddie Mac increases the borrower’s qualifying income by an amount equal to the estimated energy savings and can adjust the value of the home to reflect the increased value of the energy investments. FHA EEMs allow lenders to add 100 percent of the additional costs of energy efficiency improvements to an already approved mortgage, up to a maximum of $8,000 with no additional down payment. VA EEMs, for military, reservists and veterans, cap energy improvements at $6,000 with no additional down payment.

Some of the programs offer additional benefits, such as discounted mortgage rates, reduced loan fees and assistance with closing costs. In addition, borrowers can sometimes obtain more than one EEM and combine their loans with other energy efficiency programs, such as California utility rebates under the Prescriptive Whole House Retrofit Program or the proposed federal HOMESTAR program of incentives for home energy improvements.

Bricmont pointed out that home buyers who don’t improve the energy efficiency of their newly purchased used homes not only miss out on some extremely cost-effective EEM programs, but also put their long-term investment at risk. By 2020, all new residential construction in California must meet net-zero energy standards, which means the bar for all homes will raise sharply – and without energy upgrades, your home could become obsolete and significantly less valuable.

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