HomeStyle Energy Mortgage Pros and Cons
The HomeStyle Energy Program is offered by Fannie Mae through participating lenders. From the borrower’s standpoint, the involvement of Fannie Mae is less important because you interact with the lender, not Fannie Mae, when you apply for a HomeStyle Energy loan.
The HomeStyle Energy Program offers borrowers several advantages including financing energy efficiency improvements with one mortgage, requiring a low down payment or equity position, financing based on the post-improvement property value as well as the ability to reduce your energy costs and increase your home value. Program negatives include a limit on the amount of loan proceeds that can be used for energy efficient upgrades, additional closing costs and a longer closing timeline as well as loan limits.
We review the full list of pros and cons for the HomeStyle Energy Mortgage Program below. Borrowers should understand both the positives and negatives of a HomeStyle Energy mortgage to determine if it is the right green mortgage option for them.
HomeStyle Energy Mortgage Pros
Finance a Home Purchase or Refinance Plus Major Energy Efficiency Improvements with One Loan
The HomeStyle Energy Program enables you to finance the purchase of a home or refinance your existing mortgage and include the cost of significant energy efficiency improvements with one mortgage as opposed to arranging a mortgage plus a second mortgage, home equity loan, line of credit or PACE loan to finance the improvements. Using a single home loan instead of two separate loans streamlines the financing process and saves you money and time. The HomeStyle Energy Program offers borrowers an efficient and more cost-effective solution to financing energy efficient upgrades when they buy or refinance a home.
Mortgage Amount Based on Post-Improvement Property Value
In most cases lenders do not provide a mortgage based on the value of the property after home improvements have been completed which means that borrowers qualify for a smaller mo and are required to arrange a separate loan to finance energy efficiency improvements. Only after the improvements have been completed can borrowers refinance their mortgage and separate loan based on the higher, as-completed property value. The HomeStyle Energy Program, however, allows you to qualify for a mortgage based on the post-improvement property value. Using the higher as-completed property value enables borrowers to qualify for a larger mortgage and also eliminates the need to arrange separate financing for the energy efficiency improvements, which saves borrowers time and money.
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Boost Energy Efficiency and Improve Property Value
Energy efficiency home improvements provide the double benefit of lowering your energy costs while increasing your property value at the same time. For example, using the HomeStyle Energy Program to install a solar energy system reduces your monthly utility costs and also boosts the value of your home. Even small energy efficiency improvements such as adding insulation or installing low flow faucets can save you money on your heating and water bills. In many cases, energy efficient upgrades add more value to your property than other home renovation projects. Borrowers can use the HomeStyle Energy Program to reduce their monthly utility expenses in the near term and increase their property value in the long term.
Low Down Payment / High Loan-to-Value (LTV) Ratio
The HomeStyle Energy Program only requires that borrowers make a down payment of 5% of the property purchase price or the case of a refinance, borrowers are only required to have 5.0% equity in the property, which implies a loan-to-value (LTV) ratio of 95.0%. The required down payment or equity position of 5% is lower than the 10% - 20% required by other standard mortgage or home improvement loan programs, although it is higher than the 3.5% down payment required by the FHA Energy Efficient Mortgage (EEM) Program. Requiring a low down payment when buying a home or equity position when refinancing makes the HomeStyle Energy Program an attractive financing option for borrowers who struggle to save money to buy a home or who have limited equity in their home.
Applies to Both Home Purchase Loans and Refinancings
The HomeStyle Energy Program can be used for both home purchase loans and refinancings. Although the program is typically used to buy homes it is also useful for borrowers who are seeking to refinance their existing mortgage and implement a major energy efficiency improvement project at the same time. Borrowers with high loan balances and limited equity in their homes may find it challenging to qualify for a second mortgage, home equity loan or HELOC to finance a home improvement project. Borrowers in this situation, however, can use a HomeStyle Energy loan to both refinance their existing mortgage and finance major energy efficiency home upgrades.
Opportunity to Combine with Other Fannie Mae Mortgage Programs
The HomeStyle Energy program can be combined with other Fannie Mae mortgage programs such as HomeReady and HomeStyle Renovation. The HomeReady Mortgage Program enables borrowers to buy a home with a low down payment and permits borrowers to use non-traditional income sources and credit profiles. The HomeStyle Renovation Program enables borrowers to use up to 50% of mortgage proceeds to finance significant home repairs or renovations. Borrowers can use the HomeStyle Energy and HomeStyle Renovation programs together to finance energy efficiency improvements as part of a large home remodeling project.
HomeStyle Energy Mortgage Cons
Limit on Proceeds for Energy Efficient Improvements
The HomeStyle Energy Mortgage Program only allows borrowers to use up to 15% of the post-improvement property value in loan proceeds for energy efficiency improvements. For example, for a home with an as-completed property value of $150,000, borrowers can only use $22,500 in loan proceeds for energy efficiency improvements ($150,000 (home value) * 15% = $22,500 in improvements). Although the 15% limit should provide sufficient proceeds for most improvements, it may prevent you from undertaking larger energy efficiency projects. Additionally, the proceed limit restricts the amount of work that can be completed on less expensive homes.
Extra Closing Costs and Documentation
Borrowers are required to provide lenders a detailed plan that itemizes the energy efficiency improvements they want to make to a property. The plan outlines the estimated cost of the improvements and quantifies the anticipated energy savings associated with each project. If the estimated cost of the improvements is greater than $3,500, borrowers are required to obtain an energy report from a certified auditor to document the improvements. Preparing the energy improvement plan and obtaining the energy report, if necessary, adds time and cost to the mortgage process. For example, an energy report from a certified auditor or consultant typically costs $400 - $800, although this cost can be included in your loan amount. Additionally, due to the additional work required to process a HomeStyle Energy loan, most lenders charge an additional origination fee which is an extra closing cost for borrowers. Borrowers should fully understand any additional lender or third party closing costs for a HomeStyle Energy loan before selecting a lender.
Loan Limits
The HomeStyle Energy program limits the size of loan you can obtain through the program. The program uses the conforming loan limit, which is $726,200 for a single unit property in the contiguous United States. In Alaska and Hawaii the conforming loan limit is $1,089,300 for a single unit property. People who live in more expensive areas of the country may find that the loan limits restrict their housing options. The loan limits are less of a factor for borrowers who are financing less expensive homes.
More FREEandCLEAR Resources
HomeStyle Energy Mortgage Guide
Review our comprehensive overview of the HomeStyle Energy Mortgage Program including borrower qualification requirements and other important program information such as property eligibility, energy efficiency improvement project guidelines and loan limits.
Mortgage Rates
HomeStyle Energy mortgages are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our mortgage rate tables to contact lenders in your area to determine if they offer the HomeStyle Energy Program and to compare updated interest rates and fees. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Summary of Energy Efficient Mortgage (EEM) and Green Mortgage Programs
Review and compare important program features and eligibility requirements for multiple energy efficient mortgage (EEM) and green mortgage programs so that you can select the financing option that is right for you.
Sources
"HomeStyle Energy Mortgage." Lender Fact Sheet. Fannie Mae, 2019. Web.