Energy Efficient Mortgages were developed by the lending industry to give the buyer of an energy efficient home credit for the fact that the home will have lower energy bills than a typical home. The program is typically used for new energy efficient homes, but can also be used for existing homes that are already energy efficient (thus impacting resale value of energy efficient homes).
Many lenders are offering incentives such as free credit report, free appraisal, reduced or no processing fees, lower interest rates and discounted loan origination fees to buyers of energy efficient homes. These incentives are nice but, pay attention because the fun is just beginning.
An Energy Efficient Mortgage allows a lender to stretch both the housing debt-to-income ratio and the total debt-to-income ratio by two percentage points. “So what?” you say. Maybe you want to purchase a nice new three bedroom home in a good school district. You’re trying to decide between two builders. One builds a good house but with little effort to make it energy efficient. The other builder (D. A. Brown Construction, Inc.) has invested time and materials to provide clients with homes that can documented as more comfortable and energy efficient. The conventional home costs $100,000. The energy efficient home costs $105,000 (worst case). Both look about the same and have the same amenities. Which way are you going to jump?
The total monthly payment (PITI) for the energy efficient home will be $33 higher but the utilities will be $37 (at least) lower. It will cost you less each month to own the energy efficient home right from day one. Not exactly like winning the lottery, but your mortgage payment will remain the same for the next thirty years while utilities will increase on a regular basis. Keep in mind that the mortgage interest is tax deductible and energy costs are not.
Some other intriguing things happen with the s t r e t c h. The conventional home will require a monthly income of $3,013 to qualify for the $100,000 loan while the energy efficient home only requires a monthly income of $2,922 to qualify for the greater amount. Looking at the flip side of that – If your income was $36,159 you could qualify for a $90,000 mortgage on a conventional home. However, if the home was energy efficient, you would qualify for $98,213. Since the extra cost for energy efficiency measures is typically only $2,000 to $5,000, you would have an additional $3,000 to $6,000 to spend on other amenities like a whirlpool tub, a larger kitchen, better flooring or a workshop area in the garage!