"Green Mortgage"

FHA Expands “Green Mortgage” Feature (ML 2009-18)

Link to Mortgagee Letter »

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Notable Date:

Effective immediately

Industry Participants Affected:

Builders, Realtors, FHA Approved Lenders

Synopsis:

FHA has increased the amount of effective energy improvements that may be added to the base FHA maximum mortgage amount limit under the Energy Efficient Mortgage (EEM) program. The maximum amount for the portion of the EEM for energy improvements is the lesser of 5% of:

• The value of the property, or
• 115% of the median area price of a single family dwelling, or
• 150% of the conforming Freddie Mac limit

The EEM program allows a borrower to finance 100% of the cost-effective energy package as long as the present value of the energy saved over the useful life of the improvements is demonstrated. For example:

Sam and Sally Homebuyer are purchasing a 20 year old home and the value is $300,000. They want to take full advantage of the EEM feature, which is $15,000 (5% of $300,000).

They have decided to replace the old windows with energy efficient windows and replace most of the dated appliances with Energy Star appliances. The current utility bills for the home average $350 per month.

Mr. and Mrs. Homebuyer have consulted a certified Home Energy Rater and the Rater has provided a report which indicates with the improvements the average monthly utility cost based on today’s value is $250 per month, a savings of $100 per month. The average life of the energy improvements is 15 years or 180 months.

The energy savings over the life of the improvements will be $18,000 ($100 X 180). Since the energy savings ($18,000), based on today’s energy costs, are more than the cost of the improvements ($15,000), the Homebuyers’ qualify for the EEM feature.

The new maximum base loan amount with the EEM feature is the original base loan amount plus the cost of the cost-effective energy improvements. In this example, the new base loan amount is $304, 500 (300,000 X .965 + 15,000).

The EEM may be used for all property types, purchase and refinance transactions, including streamline refinances. New construction and existing construction are also eligible for EEM. In addition, EEM may be used in conjunction with the 203 (k) and Streamline K programs.

A qualified home energy rater must perform an analysis of the cost-effectiveness of the energy improvement using Home Energy Rating System (HERS) guidelines. The energy rater must provide the borrower and the lender with a written home energy rating report. The report will include an estimate of the current energy cost vs. the proposed energy costs with the improvements. Many home improvement stores have qualified home energy raters on staff. There are also a few home energy service networks with accredited home energy rater members, which can be found through an internet search.

Additional guidelines for underwriting an EEM and assuring completion of the energy savings improvements include:

• Initially underwrite the loan as if the EEM feature did not exist. For new construction, subtract the cost of the energy package from the sale price since the builder has included the improvements in the sale price.
• Use the information in the HERS report to determine if the improvements are cost-effective and qualify for the EEM feature.
• If cost effective, add the energy package cost to the maximum base loan amount, and calculate the loan amount with UFMIP. Note: The FHA maximum loan limit for the area may be exceeded by the cost of the energy efficient improvements.
• The qualification ratios may be stretched to 33/45 with the EEM.
• The FHA Loan Underwriting and Transmittal Summary (92900-LT) must indicate the EEM feature; show the cost of the energy improvements, and the final loan amount calculations.
• The appraisal does not need to reflect the value of the energy package.
• For new construction the energy improvements must be made prior to closing.
• For existing construction the improvements should be made within 90 days of closing. If the improvements are made post-closing, the lender must establish an escrow account, execute form HUD 92300, Mortgagee Assurance of Completion, and obtain a final inspection when the improvements are complete.

This recent change is a great opportunity for FHA approved lenders to market “green mortgages.” Let your Realtors and builders know how the EEM feature can help them sell more homes to energy conscious homebuyers, and get to know qualified home energy raters in your market. Home energy raters are an excellent referral source for current homeowners that want to include the cost of energy-effective improvements with the refinance of their current mortgage.

See ML 2005-21 for additional guidance.