oikos®

Energy Source Builder

More House for the Money

Energy saving features will pay for themselves over time. With an energy efficient mortgage (EEM) your investment will pay off right away. EEMs have three benefits: they increase buying power, provide positive cash flow and help to borrowers qualify for a loan.

Here's how it works: Mortgage financing usually doesn't take energy costs into account, even though energy is a major household expense. In a typical home, energy consumes about 10 percent of the budget. In households with limited income, that can climb as high as 30 percent.

Energy efficient mortgages recognize energy costs along with other recurring payments, such as principal, interest, taxes and insurance. By investing in energy saving features, buyers will save money every month.

Of course, extra insulation, better windows, more efficient equipment and other energy saving additions cost money up front. This cost can simply be added to the mortgage.

"By financing these costs, the monthly savings will be greater than the additional monthly payment," says Jim Curtis of EEMs, Inc. in Palo Alto, CA. "In most cases, owners of energy efficient homes enjoy positive cash flow from the first month."

For new construction, the energy saving features are built-in. EEMs can also be used to finance energy improvements for existing homes.

How to Qualify

To be considered energy efficient, a home must meet or exceed the Council of American Building Officials 1992 Model Energy Code (MEC). Utility certification programs, such as Super Good Cents, easily exceed this standard. Statewide building codes in 19 states, including Washington and Oregon, also meet these requirements. HUD/FHA now requires all new homes with HUD insured mortgages to meet the 1992 MEC. Although the rules differ, the Veterans Administration also offers an EEM. Secondary mortgage buyers, Freddie Mac and Fannie Mae, have accepted EEMs in their portfolios for many years.

Hassle-Free 2% Increase

Lenders cap mortgages based on the buyer's monthly income--usually the limit is 28 percent. If a buyer's mortgage-to-income ratio is too high, the lender has some flexibility to increase the ratio by documenting "compensating factors."

An EEM provides a quick and easy increase worth two percentage points without the hassle of documenting compensating factors. HUD/FHA insured loans for new construction automatically qualify for a mortgage-to-income ratio of 31 percent, instead of the their normal 29 percent. The increased ratio can be used again for subsequent loans on that same property. In states where the building code meets the 1992 MEC, little additional documentation may be needed. Utility certification through Super Good Cents or similar programs can also streamline the process.

Affordability

Builders who target the affordable house market can use EEMs to qualify more buyers. Ryland Homes, with operations in 16 states, has used the stretched ratios since the mid-1970s when they participated in a pilot program through Fannie Mae.

"About 15 to 20 percent of the homes built in our mid-Atlantic region take advantage of the stretch," says Dick Tracey, Manager of Engineering Services for Ryland. "That would be 500 to 600 homes per year." Most of those needing the stretch are first-time buyers. However, there are times when move-up buyers' dreams exceed their budgets, and they need an extra two percent.

More Interest From Lenders

EEMs have been around since the early 1980s, but were not well known by real estate agents, lenders, regulators or government agencies. Things are changing. Several national mortgage lenders, such as GMAC, Norwest and First Interstate, now promote EEMs in all or parts of their territories. Local and regional lenders are another good source.

One factor encouraging the financial community to use more EEMs is the concern over affordability. The Community Reinvestment Act has encouraged many lenders to increase loans to borrowers that would have been considered only marginally qualified in the past. By employing EEMs, lenders can make more loans, while satisfying the secondary market and keeping risk low. Lending on energy efficient property should be more secure, because the monthly energy costs will be lower and more predictable as energy prices climb.

"The net effect of an EEM is to qualify loan applicants with 7 percent lower income," says Curtis. "Nationwide, that increases the pool of qualified applicants by a quarter million."

Now is the time to give EEMs a try.

Energy Efficient Mortgage
	Typical	Efficient
Positive Cash Flow
Energy Saving Additions	$0	$4,000
Mortgage Amount	100,000	104,000
Monthly Payment (PITI)	840	868
Monthly Energy Costs	90	50
Total Monthly Payments	930	918
Monthly Cash Flow		+12
More Buying Power
Debt-to-income ratio	28%	30%
Monthly Income	3,000	3,000
Maximum Monthly Payment (PITI)	840	900
Mortgage Amount	$99,400	$103,000

These illustrations assume an interest rate of 7.5% for a 30-year loan. Costs and savings will depend on many local variables, such as climate, material and labor costs, building codes and taxes. PITI means principle, interest, taxes and insurance.