Energy-Efficient Mortgages?

A recent article highlights yet another benefit of energy-efficient homes: they could qualify you for an energy-efficient mortgage (EEM).  Since an energy-efficient house costs less to operate, Fannie Mae, the government-established private company that backs mortgages for low- to moderate-income homebuyers, recognizes that the money saved can be spent on housing costs. Thus, it adds the projected savings to the borrower’s income, raising that income and qualifying them for a larger mortgage.  Built Green has a nice example how this can work on paper.

While the EEM has been around since 1979, it was little used until Fannie Mae reduced the complex paperwork a few years ago.  To qualify these days, a borrower must buy a new energy-efficient home--or commit to upgrading an existing home--and pass a Home Energy Rating System inspection.  The borrower then gets a one-page report to show to lenders when applying for a Fannie Mae-backed loan.

In light of my previous post about the trend towards bigger houses, I'll add the caveat that the efficiency ratings used to qualify for an EEM appear to look at the individual feature of the house--nsulation, efficient heating and cooling systems, etc.--but not necessarily the total energy use of the house. 

Ironically, then, by qualifying buyers for a larger loan, the EEM may encourage the purchase of bigger houses that could use as much total energy as a smaller, less-efficient house.  While this may help Fannie Mae customers buy as much house as they can afford, the EEM may not actually save any energy.  This issue bears considering if energy-efficient mortgages become popular offerings on the rest of the lending market.

As a side note, EEMs aren't the only green options Fannie Mae offers.  Fannie Mae is also piloting the Smart Commute Initiative for borrowers buying a home near public transit.  Similar to the EEM, this option, often called a location-efficient mortgage, recognizes the savings from living in a transit-friendly community.  Seattle is one of the pilot cities for Fannie Mae’s location efficient mortgages, although it looks like a couple lenders may offer them to all customers.  The city of Seattle even has a map showing the most efficient locations.