Energy-Efficient Mortgages: Here’s What You Need to Know
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Energy-efficient mortgages (EEMs) can help you finance energy-saving improvements to a new or existing home and cut down on your utility bills. This mortgage program is available through conventional, VA and FHA lenders.
What is an energy-efficient mortgage?
An energy-efficient mortgage (EEM) allows a borrower to buy an eco-friendly home or make energy-saving improvements to an existing home.
EEM vs. regular mortgage
While an EEM isn’t a separate loan from a traditional mortgage, an energy-efficient mortgage typically has a higher loan amount and requires extra steps before approval. Specifically, you’ll need to obtain a home energy assessment before you get to the closing table.
You’ll borrow a larger loan amount with an EEM than with a regular mortgage, but you’ll save on your monthly energy bill. Consider the following example, where a borrower is taking out a 30-year mortgage with a 4% interest rate and making a 5% down payment:
| Existing home | Existing home + $6,000 in energy improvements | |
|---|---|---|
| Home price | $250,000 | $256,000 |
| Loan amount (assumes 95% of home price) | $237,500 | $243,200 |
| Monthly mortgage payment (principal and interest) | $1,133.86 | $1,161.07 |
| Monthly energy bill (electric and gas) | $172 | $137 |
| Combined monthly mortgage and energy cost | $1,305.86 | $1,298.07 |
| Monthly savings | N/A | $7.79 |
Energy-efficient mortgages (EEMs) vs. energy-efficient homes (EEHs)
Both energy-efficient mortgages and energy-efficient homes help borrowers ultimately save on their utility bill, but do so in different ways. The energy-efficient home program stretches a borrower’s qualifying ratio by 2% over the standard limit, while an EEM can lead to a higher overall loan amount.
Pros and cons of a green mortgage
| Pros | Cons |
|---|---|
| Raises your home's resale value | Requires an extra underwriting process prior to loan approval |
| Helps you qualify for a larger loan amount | Follows strict loan limits |
| Saves you money on utility bills | Increases your down payment amount |
| Gives you energy-efficient benefits without moving (if refinancing) | Enforces stringent requirements in some cases, including a minimum credit score |
Types of energy-efficient mortgage programs
VA Energy-Efficient Mortgage
A VA Energy-Efficient Mortgage (VA EEM), is an additional loan amount added to the regular VA loan to make energy-efficient home improvements. To qualify, you must first be eligible for a VA loan.
Examples of eligible energy-efficiency improvements under this program:
- Improving ceiling, attic, wall or floor insulation
- Solar heating and cooling systems
- Thermal windows or doors
Loan limits:
- Up to $3,000 with documents showing the costs
- Up to $6,000, provided the monthly utility savings outweigh the improvement costs
- More than $6,000 in improvements requires prior VA approval
Minimum credit score: 620 with most lenders
Down payment: 0%
Requires home energy assessment? Yes
| Pros | Cons |
|---|---|
| You can conveniently pay for the energy-efficient improvements over the loan term | You must be an eligible military borrower or surviving spouse to qualify |
| You're not required to make a down payment | You're typically limited to $6,000 in energy improvements |
| You're not required to pay mortgage insurance | You'll likely pay a VA funding fee |
FHA energy-efficient mortgage
The FHA energy-efficient mortgage program helps you cover energy-efficient home improvements with an FHA-insured mortgage for a purchase or refinance. Unlike VA EEMs, the FHA doesn’t require borrowers to qualify for the portion of the loan amount that finances the energy improvements. Similar to a VA EEM, though, the FHA EEM program requires a home energy assessment.
You can combine an FHA EEM with the other FHA programs such as:
- FHA 203(k) program, which finances various types of home improvements
- Energy-Efficient Home (EEH) program, which stretches the borrower’s qualifying ratio by 2%
- FHA’s solar and wind technologies policy, which increases the loan amount to cover the installation of a new solar or wind energy system
- FHA’s weatherization policy, which finances up to $3,500 for items such as thermostats and insulation
Loan limits: Typically $1,500 to $25,000, determined by the lesser of:
- The cost of energy improvements based on the home energy assessment
- The lesser of 5% of:
- The adjusted home value
- 115% of the median price of a single-family unit
- 150% of the national conforming loan limit
Minimum credit score: 580 with 3.5% down payment; 500 with a 10% down payment
Down payment: 3.5%
Requires home energy assessment? Yes
| Pros | Cons |
|---|---|
| You can combine with other FHA programs | You'll make at least a 3.5% down payment |
| You'll have a relatively high loan limit | You're required to pay FHA mortgage insurance |
| You're not required to have a high credit score | You'll need to keep your DTI ratio below 43% in most cases |
Conventional energy-efficient mortgage
You can also get an energy-efficient mortgage through a conventional loan program. The HomeStyle® Energy Mortgage through Fannie Mae and GreenCHOICE Mortgage® through Freddie Mac programs can help you finance a new home or refinance a home with eco-friendly improvements.
The HomeStyle® Energy mortgage program allows you to make upgrades, such as installing solar or geothermal power to a new or existing house. You may also combine this program with the HomeStyle® Renovation and HomeReady® programs.
HomeStyle® Energy Mortgage
Loan limits: Up to 15% of appraised property value after energy improvements
Minimum credit score: 620 for fixed-rate loans
Down payment: 3%
Requires home energy assessment? Yes, unless there are basic weatherization and water-efficiency items up to $3,500
GreenCHOICE Mortgage®
Similarly, the GreenCHOICE Mortgage® program from Freddie Mac covers energy-efficient improvements, like solar water heaters and low-flow water fixtures for new or existing homes.
Loan limits: Up to 15% of appraised property value after energy improvements
Minimum credit score: 660
Down payment: 3%
Requires home energy assessment? Yes
| Pros | Cons |
|---|---|
| You may be able to combine loan programs | You'll have a higher minimum credit score requirement |
| You'll have relatively higher loan limits | You'll need at least a 3% down payment |
| You can have basic weatherization and water-efficiency improvements covered without an energy assessment | You'll pay for private mortgage insurance with less than a 20% down payment |
When would I need an energy-efficient mortgage?
You’d need an energy-efficient mortgage whenever you purchase a new home or refinance your existing home. If you’re planning to purchase or refinance your home, consider the energy improvements you’d need and start the process of obtaining a home energy assessment.
How do I qualify for a green mortgage?
To qualify for a green mortgage, you must have a professional conduct a home energy assessment. This assessment tells the lender whether the new or existing home with improvements is energy-efficient by providing a Home Energy Rating System (HERS) score.
What is a HERS rating and how do I get one?
HERS is the nationwide industry standard for calculating your home’s energy performance. The scoring scale runs from 0 to 150, where 100 marks a standard home and a 70 is 30% more energy-efficient than a standard home. You can find a local HERS rater by searching the RESNET National Rating Registry.
Allowable energy-efficiency improvements
- Improving or replacing a cooling system
- Improving a chimney
- Installing wind or solar technologies
- Installing insulation throughout the home
- Installing new windows or doors
How do I shop for a green mortgage?
You shop for energy-efficient mortgages the same way you would a regular mortgage. You’ll also need to decide whether you’ll purchase a new, energy-efficient home or make improvements to an older home. You’d then apply for a mortgage preapproval to better understand your housing budget.
How do I find green mortgages in my area?
You can find an EEM in your area by searching for local lenders that offer them, including banks, credit unions and mortgage companies.
What energy improvements aren’t worth the cost?
If the energy improvements aren’t worth the cost, your lender won’t approve the EEM. For instance, if your existing home has an 80 HERS score, then energy improvements might not be worth the cost, since the home is already 20% more energy-efficient than a standard home.
Alternatives to a green mortgage
If you’re not eligible for an energy-efficient mortgage, you can consider the following options:
Cash-out refinance
A cash-out refinance will allow you to use a portion of your home equity for home improvements, like installing energy-efficient appliance systems.
Home equity loan
A home equity loan allows you to borrow a lump sum of your equity and repay it in monthly installments. You can use this loan to cover energy-efficient improvements.
Personal loan
While interest rates are higher compared to home loans, a personal loan can help you cover any energy-saving home improvements you may have in mind.