Fall is officially here and while green leaves are changing to red and gold, the world of residential finance for green building is still budding. Because green lending is a relatively new industry, not much is known and what is known is in constant flux. The following article provides a snapshot of the current situation. It also sheds some light on currently available green finance options and green mortgage trends.

Current Trends

While financing for green features does exist, the process from application to approval is not easy to navigate. In fact, the procedure is much more complex than standard FHA or conventional loans. Fortunately, new legislation from Congress aims to make this process more streamlined and provide funds for 50,000 energy efficient mortgages (EEMs).

While many parties are on board with green building, a significant bottleneck has been created by limited access to residential green financing. However, based on recent demand for green homes, lenders are beginning to realize the potential of green mortgages. The market will continue to expand in the future.

Options in Today's Market

Energy Efficient Mortgages (EEMs) - Offered through FHA, VA, Fannie Mae, and Freddie Mac

1. EEMs allow financing beyond the purchase price of a home for energy improvements approved by a Home Energy Rating System (HERS) inspection report.
2. Financing limited to 1-4 unit properties.
3. Energy efficient upgrades are completed after the transaction closes.
4. Maximum amount allowed is the lesser of:
Dollar amount of HERS-approved energy improvements, plus cost of HERS report

The value of the property, or
115% of the median area price of a single family (about $250k for Portland), or
150% of the conforming Freddie Mac limit ($625.5k for Portland)
5. Appraised value of the property does NOT need to meet the property + improvements value (e.g., a home could appraise for $300k but have a $310k total cost with post-close improvements).

FHA 203(k) Rehab Loans

1. Purchase price + renovation costs rolled into one loan

2. Renovation occurs post-close

3. Limited to structural or safety based renovations

4. Maximum of $35,000 for renovations

Emerging Trends

PITIUM (PITI + Upkeep and Maintenance)

Lenders are considering factoring the cost of upkeep and maintenance into loan approval criteria. Since green homes typically require less maintenance and their components last longer, this creates an incentive to own a green home. See the following chart. Even with an increased mortgage, the total monthly payment is lower if energy efficiency measures are incorporated because of decreased utility bills.

Legislative Action

Pending legislation in Congress (such as H.R. 2454) seek to reestablish EEMs as a more accessible loan type. Some changes proposed include the following:

Funding for 50,000 EEMs.
Mandates for Fannie Mae and Freddie Mac to develop energy efficient mortgage products.
Reduced income requirements for applicants purchasing property close to transit lines.
Requirements for real estate appraisers to undergo green building training.

Moving Forward

Expect to hear more about congressional action pressuring banks to increase the availability of green mortgages. In combination with recent studies showing decreased foreclosure rates for owners of green homes, this pressure will make green mortgages difficult to ignore. Banks will increase funding options for green properties while below-market interest rates for consumers purchasing those homes will become more common.

If you have any questions about energy efficient mortgage or 203(k) rehab loan, please don't hesitate to give me a call.

BIO:

Mortgage broker Dakota Gale was trained as a mechanical engineer at Cal Poly San Luis Obispo, and Chalmers University of Technology in Sweden. His design experience includes solar panels, semiconductor technology, and LEED® certified green buildings. He is a LEED Accredited Professional and teaches a class on sustainability at Marylhurst University. Gale also teaches workshops on green financing and paperless technology.

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