There are multiple mortgage programs that enable borrowers to finance the cost of energy and water efficient improvements to their home. Known as energy efficient mortgages, EEMs or green mortgages, these programs offer several benefits to borrowers. Most energy efficient mortgage programs allow borrowers to add the cost of energy efficient upgrades to their loan amount which eliminates the need to obtain a separate loan or pay for the improvements out of pocket. Including the cost of improvements in your mortgage typically saves you significant time and money as compared to arranging separate financing or using a credit card or a personal loan.
Making energy efficient improvements to your home can also yield meaningful financial benefits. Homeowners benefit from lower utility costs, potential tax credits and utility rebates for installing energy efficient appliances and an increase in property value. Plus the improvements typically lower emissions and reduce energy or water consumption which is positive for the environment. Examples of energy and water efficient home improvements include solar energy systems; wind energy systems; hot water heaters; new windows and doors; new heating, ventilation or air conditioning (HVAC) units; new roofs; new toilets, showers or faucets; new insulation or ducts; and, general weather-proofing or weatherization projects.
As an added benefit, because the energy efficient improvements reduce your monthly utility costs, energy efficient mortgage programs enable borrowers to qualify for a larger loan amount and buy a better home. The reasoning is the less money you spend on your utility bills, the more money you can spend on your monthly loan payment which means you can afford a larger mortgage.
Although each EEM program has unique attributes, they generally work the same way. In most cases borrowers obtain an energy report from a certified energy assessor or auditor that identifies opportunities for making energy or water efficient improvements to their home. The energy report also determines the cost-effectiveness of the improvements to ensure that the upgrades you implement pay for themselves over time. For example, if you install new windows, the report estimates the monthly savings you realize by reducing your energy costs. In short, the programs are designed to make sure that you realize a return on the investment you make in the improvements.
After you have identified the scope of energy efficient home improvements you want to make, you work with your lender to add the cost of these improvements to your mortgage amount. The lender also qualifies you as a borrower based on your credit score, debt-to-income ratio and qualification requirements. Assuming your loan application is approved and there are no issues with your property appraisal and title report, the mortgage closes and the loan funds allocated for your home improvements are placed in an escrow account.
You typically have 90 to 180 days after your mortgage closes to use the funds in the escrow account to complete the energy efficient upgrades. Please note that most energy efficient mortgage programs prohibit borrowers from taking any cash proceeds from the loan and any leftover funds in the escrow account must be applied to your mortgage balance.
Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including multiple home improvement options.
Although all energy efficient and green mortgage programs offer borrowers similar benefits, their guidelines and requirements vary. There are several questions borrowers should consider when evaluating which EEM program is right for them.
What are the program borrower qualifications?
Each energy efficient mortgage has a specific set of borrower qualification guidelines. Most of the programs focus on the borrower’s credit score, debt-to-income ratio and employment history. The PACE Loan Program, however, is less focused on the borrower and more on the property being financed and how much equity you have in the property. In some cases, EEM programs apply more flexible borrower qualification guidelines, such as using a higher debt-to-income ratio, which enables the borrower to qualify for a larger mortgage. Make sure you understand the borrower qualification requirements before you apply for a program.
Is there a loan limit?
All of the energy efficient mortgage programs listed below apply limits to the size of mortgage or loan you can obtain. In some cases, the loan limit for an EEM program is higher than the limit for other types of mortgages, which enables you to qualify for a larger loan. Be sure that the mortgage amount you are seeking does not exceed the program loan limit.
Is there limit to energy efficient improvements I can make?
Yes. EEM programs limit the size of improvements that can be added to your mortgage or loan. Each program uses a different formula to calculate the amount of improvements that can be financed and you should understand if your project fits within the program limit.
Does the program charge extra fees?
Because energy efficient mortgage programs require extra work and involvement on the part of the lender and third party service providers such as the appraiser, they typically charge higher fees as compared to regular mortgage programs. For example, most EEM programs require you to obtain an energy report or audit which can cost up to $800. Although the cost of the energy audit can be added to your loan amount and financed, borrowers should be aware of the extra program fees and costs at the beginning of the mortgage process.
What is the mortgage rate for an EEM loan?
The interest rate on an energy efficient mortgage is typically comparable to the rate on a similar mortgage program and depends on several factors including your credit score, financial profile and the loan-to-value (LTV) ratio. Borrowers with higher credit scores and lower LTV ratios tend to pay lower mortgage rates. In general the FHA and VA EEM programs charge borrowers the lowest mortgage rate but the FHA Program requires borrowers to pay higher ongoing fees, including the FHA mortgage insurance premium (MIP). Borrowers should compare proposals from multiple lenders to find the EEM loan with the lowest rates and fees.
What properties are eligible for energy efficient mortgage programs?
Most EEM programs apply to one-to-four unit residences. Some programs only apply to owner-occupied primary residences while others apply to non-owner occupied residences such as investment and rental properties. Additionally, new construction homes are not eligible for some programs while others such as the FHA EEM Program apply to both existing and new construction homes. Make sure that your property meets the eligibility requirement before applying for an energy efficient mortgage.
What types of mortgages are eligible for the program?
15 and 30 year fixed rate mortgages and certain adjustable rate mortgages (ARMs) are eligible for EEM programs while interest only mortgages are not allowed.
Does the program apply to both buying a home and refinancing?
Most energy efficient mortgage programs apply to both buying a home and financing improvements when you refinance an existing loan.
The table below summarizes several energy efficient mortgage programs available to borrowers. Each program has its positives and negatives and offers different benefits for borrowers. Additionally, qualification requirements vary so although you may not qualify for one program, you may be able to qualify for a different one. For example, the FHA EEM program permits lower borrower credit scores. Click on the program title to review comprehensive information about each program including pros and cons, how the program works, borrower qualification requirements and other important program information. You can use this information to find the best energy efficient mortgage program for you.
"HomeStyle Energy Mortgage." Lender Fact Sheet. Fannie Mae, 2019. Web.
"FHA Programs That Can Help Homeowners Finance Energy-Saving Improvements." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
“What is PACE financing?” CFPB. Consumer Financial Protection Bureau, March 17 2016. Web.About the author