Are you thinking of buying a home that could use some energy upgrades? Maybe the HVAC, water heater, or windows are old and inefficient.
A “green mortgage” — known to lenders as an energy-efficient mortgage, or EEM, — allows buyers to finance energy upgrades through a mortgage that allows a little extra borrowing to cover these features.
Why would a lender approve an EEM borrower for extra money? Two main reasons: Eco-friendly homes are more desirable, making the lender’s collateral more valuable. And the expected energy savings will support the homeowner’s ability to cover housing payments.
Green Mortgages Are Just Getting Started
In 1995, the Department of Housing and Urban Development rolled out the Energy Efficient Mortgage to all states. Today, homeowners across the country may apply for larger loans by choosing EEMs.
Buyers who want green mortgages should expect to have an energy assessment done on the home they plan to optimize. This will show what work needs to be done, and how much it would cost, to enhance the home’s energy efficiency.
Only about one in a hundred mortgage borrowers opt for an EEM today. This number will likely rise, for several reasons.
For one thing, home energy costs have shot up. EEMs help homeowners save money by slashing energy use at home. Insulation, energy-efficient windows and doors, water-saving features, heat pumps and solar systems are all easier to pay for, because the EEM finances the purchases at the same interest rate as the mortgage loan.
The federal government’s new Inflation Reduction Act makes all of this even better. If the home has an HVAC that’s nearing the end of its useful life, why wouldn’t the home buyer think about getting an energy-saving heat pump — through the mortgage? Then, the new homeowner could claim the federal tax credit and a rebate, too.
☛ Going Green at Home? Check out our Guide to Claiming Inflation Reduction Act Credits.
The FHA Backs Green Mortgages
Just about any lender can do a green mortgage. But some lenders are already experienced in EEMs — perhaps with loans backed by the Federal Housing Administration (FHA).
The FHA backs EEMs using its normal criteria. It looks at credit profiles and requires at least 3.5% down. (The down payment minimum depends on the borrower’s credit profile.)
The FHA-backed EEM has a lot going for it. The borrower just has to qualify for the underlying mortgage, not the additional funding for the eco upgrades. And after the home purchase, the loan is backed by the FHA so the lender is protected from the risk of default. Closing costs must either be paid in a lump sum or rolled into the monthly loan payments.
☛ Applicants, remember that an FHA borrower pays private mortgage insurance (PMI) through the life of the loan. You can review our Guide to Private Mortgage Insurance here.
The borrower can sign up for an energy package, selecting recommendations from a qualified home energy assessor. The improvements can include energy-saving equipment, work and materials, as well as inspections and the assessment itself.
Why an assessment? Because the loan has to make financial sense. The investment in green upgrades should not cost more than the money those upgrades can save over the life of the home improvements. So, a lender experienced in EEMs will have access to home energy assessors — certified professionals who can find shortfalls in a home’s energy efficiency, and recommend a package of upgrades based on their potential to pay for themselves through lower energy bills.
The energy package can even be combined with the 203(k) Rehabilitation Mortgage. That’s the FHA loan that enables a buyer to put as little as 3.5% down and get a “fixer-upper” home. The 203(k) escrow funds should be tapped for home improvements within one to six months after the home purchase.
When the borrower’s home meets certain efficiency standards, the FHA loan may be expanded by 2% over regular limits. A borrower can use the extra funds to have a renewable energy system (like solar) installed. And the loan can include up to $3,500 to pay for thermostats, insulation, and other weatherization features.
To learn more, you can call an FHA-approved lender.
Conventional Mortgages Go Green
Prefer a conventional mortgage to an FHA-backed loan? That’s possible, too. Of course, rules for borrowers differ somewhat between these mortgage types.
The government-sponsored home loan powerhouses Freddie Mac and Fannie Mae will back energy-efficient mortgages. If you are interested in taking out a conventional loan as an EEM, a mortgage specialist can let you know what’s available and get you started on your application. To find a good lender, you could also ask for leads from a trusted real estate agent, or check at your local bank or credit union. Terms and rates vary, depending on the loan type and brokerage. Comparison shopping is encouraged!
If you and your selected home are eligible for the EEM, you can apply for energy-efficiency loan money to be added onto your mortgage, and be approved for extra funds up to 15% of the appraised value of the home after upgrades.
In this way, the mortgage loan offers several thousand dollars extra, earmarked for green improvements. This will mean a mortgage payment that is a few dollars more, monthly, than the loan without those extra funds. The electricity savings in an energy-optimized home should easily lower the borrower’s total monthly home costs, though.
☛ Refinancing? Homeowners looking to make energy-efficient upgrades to their current homes can refinance with a green mortgage. Green refinancing could become an appealing option when mortgage rates dip. Refinancing involves closing costs, but these can be offset by some of the rebates and incentives in the Inflation Reduction Act.
Freddie Mac’s GreenCHOICE Mortgage® offers eco-aware financing with any home loan type, up to 30 years. And Fannie Mae has created the HomeStyle Energy Mortgage®. In January2023, Fannie Mae added new credits and rebates to tis option. It can also provide funding for storm and disaster resilience. And it can be stacked on top of other special Fannie May loan options.
No matter what type of loan you get, greening your loan starts with the home energy assessment to identify the home’s energy needs and project the upfront costs and long-term savings involved with the upgrades. After approval, you’ll hire contractors to handle the tasks. As a rule, you’ll need to finish the work within six months after closing.
More Mortgages Set to Go Green
A green home loan involves a little extra learning, a little extra goal-setting, and a lot of satisfaction that comes with optimizing energy at home. As government policies continue leaning green, we can expect energy-efficient mortgage loans to keep gaining traction. In the years ahead, they could become the norm.
Supporting References
Cheryl Winokur Munk for CNBC LLC, part of NBCUniversal, via CNBC.com: Sustainable Returns – The Mortgage That Will Pay to Make Your Home More Climate-Friendly (updated Apr. 9 2023).
Deeds.com: Buying a Fixer-Upper: What Are the Best Financing Options? (Mar. 31, 2021).
The U.S. Department of Housing and Urban Development (HUD) online webpages on Energy-Efficient Mortgages.
And as linked.