Energy Improvement Mortgage

An energy improvement mortgage is a home loan that creates an escrow account to fund cost-effective improvements to the property’s energy efficiency.

An energy improvement mortgage provides homebuyers an opportunity to finance home improvements that generate greater energy efficiency without raising their down payment. Borrowers can obtain these mortgages either at purchase or during a mortgage refinance.

To qualify for an energy improvement mortgage, borrowers must get an energy assessment of the home they intend to purchase. Qualified energy raters, assessors or auditors must conduct the assessment, and the proposed improvements must save more on energy bills over time than they will cost to implement. Assessments typically result in a list of cost-effective improvements that meet the required criteria.

The U.S. Federal Housing Administration (FHA) insures energy improvement mortgages under the U.S. Department of Housing and Urban Development’s Energy Efficient Mortgage Program, which started as a pilot in 1992 and expanded nationwide in 1995. As with similar programs overseen by the FHA, borrowers receive energy improvement mortgages from regular consumer lending institutions. Borrowers must qualify only for the loan amount required to purchase the home. Lenders do not include the portion of the mortgage to be used for energy efficiency improvements when qualifying borrowers.

Energy improvement mortgages work on the theory that a homeowner’s potential savings from increased efficiency will more than cover the extra up-front capital costs of making the changes. For example, homeowners can expect appropriate improvements to insulation or upgrades to heating, ventilation and air conditioning (HVAC) systems to save ongoing expenses for electricity, fuel or both, depending on the type of system involved. Such improvements also tend to improve the home’s resale value, offering more equity for the homeowner and more valuable collateral for the lender.

The FHA distinguishes energy improvement mortgages from a similar offering it calls energy efficient mortgages. Where energy improvement mortgages offer extra funds to make energy improvements, energy efficient mortgages give homebuyers a credit for energy efficiencies already present in the home they purchase. These mortgages require a similar energy audit conducted by a qualified energy rater, assessor or auditor. As with energy improvement mortgages, borrowers qualify for extra loan funding insured by the FHA based upon the amount of cost savings identified. For energy efficient mortgages, the FHA sets a maximum loan increase calculated as 5 percent of the lesser of 1) the value of the property, 2) 115 percent of the median price of a single-family home in the area or 3) 150 percent of Freddie Mac’s current limit for a conforming mortgage loan.