Energy Efficient Loans: How They Work

Using less energy could allow you to qualify for a larger mortgage.

An energy efficient loan can enable a home buyer to qualify for a larger mortgage if they’re buying a home with energy-saving characteristics. If the home qualifies, the lender will often be willing to make the buyer a bigger loan, since they will save money on monthly utilities. The savings allow the buyer to allocate a larger portion of their income to their mortgage than they could with a conventional home. In other words, when saving money on utilities, the lender grants the borrower a greater debt-to-income ratio. This usually translates into the buyer qualifying for 2 percent more debt.

Not only can an energy efficient loan be used in the purchase of a new home (either existing or new construction), but it can also be used to make an existing home more energy efficient.

Buying a new home

1. Find the house that you want to buy and let the lender know that you want an energy efficient loan.
2. Have an Energy Rater conduct a HERS (Home Energy Rating Systems) report on the house. A HERS report looks at the home’s insulation, windows, the local climate and utility rate to give the home a score. The report includes the rating, any recommended upgrades, the score after any upgrades, and the total energy costs before and after upgrades.
3. The lender gets the home’s energy ratings report.
4. If the home qualifies, the lender then increases the borrower’s qualifying ratios, usually by 2 percent, so that the borrower can buy a more expensive house if the energy efficient home costs more.
5. Finally, there is a closing just like with any home sale.

If you want to improve your existing home, refinancing to an energy efficient loan may also be an option. Sometimes, lenders will roll the expense of cost-saving into a new energy efficient loan. The monthly mortgage payment may go up somewhat, but after the upgrades, the utility payments should decrease by more than the payment goes up. If this is so, more money becomes available for the mortgage. If you are interested in refinancing into an energy efficient loan, the process is likely to be as follows.

Upgrading an existing home

1. Inform your lender that you want to refinance to an energy efficient loan.
2. Have an Energy Rater conduct a HERS report (see above).
3. The lender puts funds in an escrow to pay for the improvements.
4. You close on the energy efficient loan.
5. After the improvements are completed, the escrow is cleared.

Whether improving an existing home or buying a new one, an energy efficient loan can enable you to buy a better, more efficient house. However, it is important to crunch the numbers for yourself. Know the current utility costs and compare those with the estimate of what you will pay after the home improvements. Significant savings can mean that an energy efficient loan is a smart move for you.