Mortgage lenders interested in landing a new group of borrowers should consider green lending opportunities. And homeowners who want to lead more energy efficient lives have a variety of green lending programs available to help them.
Jodi Horne, senior credit risk analyst with Fannie Mae, discusses why green lending makes sense for many U.S. homeowners.
“The average age of U.S. homes is 37 years old, which is well before anyone was thinking about residential energy efficiency so these homes present an opportunity for energy-efficiency upgrades,” Horne said. “As homeowners have more equity in their properties, they are increasingly looking to renovate their homes and they are looking to improve energy efficiency at the same time.”
From new insulation, solar panels, energy-efficient windows, EnergyStar appliances, high-efficiency heating and water-efficiency products, green lending programs can help borrowers finance these upgrades and save money on utility costs, while doing their part to save the planet.
“For some [homeowners], it’s a cost-cutting measure if they live in an area with high heating bills,” she said. “Other consumers are motivated by a sense of responsibility to the environment.”
With the Fannie Mae program, an audit is required to help identify how much cost savings will occur with the requested energy-efficiency upgrades, which demonstrates how energy-efficient products create cost-effective outcomes for homeowners.
“Once the energy-efficient upgrades are selected, the homeowner obtains estimates or work contracts to determine the funds needed,” Horne said. “The homeowner works with the lender to incorporate those funds into the loan amount.”
At closing, those funds usually remain in escrow and the lender then distributes funding as the project is completed by the contractor. “Any excess funds not needed for the project is to be applied to the principal balance of the mortgage as a curtailment,” Horne said.
The Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development, and the U.S. Department of Veteran Affairs offer green lending mortgage programs as well. In addition, HUD launched an energy efficient mortgage pilot program in 1992, and within three years, it expanded into a national loan program.
Under this FHA program, the borrower need only qualify for the loan amount used to purchase or refinance and home, and do not need to qualify for the additional energy-efficient upgrade costs as part of the total loan. For example, if the homeowner plans to borrow $230,000 to purchase a home and an additional $5,000 for a high efficiency furnace, the borrower is only required to qualify for the $230,000 loan amount.
According to EnergyStar.gov, an EEM “credits a home’s energy efficiency in the mortgage itself.” That means borrowers have a financing option that takes energy-saving measures “to stretch debt-to-income qualifying ratios on loans, thereby allowing borrowers to qualify for a larger loan.”
To qualify for the FHA program, to borrower must obtain a home energy assessment “conducted by a qualified energy rater, assessor, or auditor using whole-home assessment standards, protocols and procedures,” according to a description of the program on HUD’s website.
Veterans who qualify for energy-efficient mortgages through the Department of Veterans Affairs also can save on their loans. The VA loan program works similarly to HUD loans, in that borrowers who qualify for their loans or refinancing can then request additional funds to purchase energy efficient upgrades, according to Veterans United Home Loans, a VA approved lender.
Because there are so many energy-efficient home products on the market, Horne sees big opportunities for both lenders and borrowers.
“To address energy efficiency in the home, I think it’s going to be a growing trend in the marketplace and that’s one of the reasons why Fannie Mae put out its HomeStyle energy mortgage offerings,” Horne said.
A big benefit to borrowers is this type of refinancing option means homeowners can finance energy-efficient upgrades without using their high interest bearing credit cards or having to secure a home equity line of credit, according to Horne. She added that green lending programs provide a good opportunity for lenders to sit down with borrowers to better understand their needs and find a loan product that matches those needs.
While some U.S. regions rank higher in terms of green lifestyles, green construction and sustainability practices, many experts believe the trend of energy-efficient practices and homes will continue to grow nationwide.
A recent WalletHub survey ranked the top green cities in the U.S. While many of the top green cities are in California, others include Honolulu, Washington D.C., Portland, Minneapolis and Seattle. However, green lending practices reach far beyond those cities, according to Cliff Staton, executive vice president with Renew Financial, based in Oakland, Calif.
“It’s a national lending product and there is national interest,” he said.
Renew, however, offers a slightly different lending product than those offered by Fannie Mae. Instead, Renew offers Property Assessed Clean Energy, which places a property tax assessment on properties through a “special assessment district” set up by local governments to help finance green energy upgrades, Staton said.
Renew offers the product in California and Florida, but similar programs can be set up throughout the U.S. Staton said 31 states have enacted laws that allow the setup of special assessment districts to help finance energy efficiency upgrades for homeowners.
“What we provide is upfront funding for people to make renewable energy improvements, energy efficiency improvements and water efficiency improvements [in their homes],” Staton said. “The payment plan is from five to 25 years.”
Homeowners can look at a list of approved products, from HVAC systems to various EnergyStar products, and then apply for financing through the special assessment district. Homeowners also can receive financing for drought tolerant landscaping that conserves water, Staton said.
“The whole value proposition from the homeowners’ standpoint is they get upfront funding for more efficient products, but it pays back over time because it uses less energy and costs less on your utility bill,” Staton said.
Freelance writer Elise Oberliesen contributed to the writing and research of this article.