Picture this—you’ve made an offer on your dream home, and the loan approval process is underway. But your “dream home” doesn’t tick all of your boxes, and your first item of business after move-in is to complete some renovations to improve the property’s energy efficiency.
Even small energy-efficient upgrades that create long-term savings on energy bills can require an upfront investment. Luckily, there’s a loan program specifically designed for homeowners looking to make their homes greener—an energy-efficient mortgage.
But what is an energy-efficient mortgage program and how can it help you create an energy-efficient home? We’ll start by exploring the concept, then dive into where you can find one, the benefits and drawbacks, and how to know if an eco mortgage is right for you.
What Is an Energy-Efficient Mortgage?
So, what are green mortgages? Also called energy-efficient mortgages or eco mortgages, green mortgages serve two primary purposes:
- They give home buyers the capital they need to make efficiency-boosting changes to their existing or future homes for more sustainable living.
- They help current buyers qualify for loans to purchase homes that are already energy-efficient.
Let’s explore examples of how energy-efficient mortgages could prove useful in each scenario:
- Katie and Laura purchased their home five years ago. They’re ready to refinance and renovate their current home since interest rates have decreased since the loan closed. While they apply for refinancing, they can also express an interest in an energy-efficient mortgage—a loan program that will fund the eco-friendly changes they want to make, like replacing their home’s old insulation.
- Angie and Pat are scouring the market for their first home. But they’re having difficulty qualifying for a mortgage that will secure the energy-efficient home they’re interested in. It features solar panels, upgraded insulation, and a new HVAC system. They could pursue an energy-efficient mortgage to give them the extra capital they need to qualify for the slightly larger mortgage needed to buy the eco-friendly property.
Examples of Common Energy-Efficient Mortgage Projects
Depending on how much funding you secure, you can get involved in any of the following projects :
- Invest in green energy by installing solar panels or adding wind turbines to their property or roof
- Decrease your home’s energy use by updating the HVAC system, adding a radiant barrier to the attic space, and replacing their insulation with higher R-value products
- Replace tank water heaters with tankless products
- Remove single-pane windows and install double- or triple-pane products
- Add a water reclamation technology to their plumbing system
- Replace appliances with low-energy, low-flow, upgraded ones
Keep in mind that this is far from an exhaustive list. Depending on what a home needs to become more efficient, there are endless possibilities for eco-friendly renovations.
How to Qualify for an Energy-Efficient Mortgage
So, you think an energy-efficient mortgage loan could meet your financial needs and help make your home more efficient—what’s next? Let’s explore how to become approved for an eco-mortgage.
#1 Purchase a New Home
You can qualify for a green mortgage in one of two ways—by purchasing a new home or refinancing the mortgage loan on your current home.
When purchasing a new home, it’s important to note how an energy-efficient mortgage fits into the loan structuring process:
- Your primary mortgage loan will cover the majority of the cost of your new home.
- Any energy-efficient mortgage products you pursue during the home-buying process can help you:
- Pay for the energy-efficient upgrades you want to make, or
- Put down enough to qualify for a primary mortgage loan on an energy-efficient property.
However, if you pursue both loan types, the eco-friendly mortgage will likely be rolled into your primary mortgage. In this case, you’d only have to make payments to one loan servicer.
#2 Refinance the Mortgage on Your Current Home
If you want to take out an energy-efficient mortgage to decrease your current home’s footprint, you can do so by refinancing your mortgage loan.
Becoming approved for refinancing is usually the same as the approval process for a traditional loan. Depending on your lender, the process may include the following steps:
- The loan servicer and underwriters will review your creditworthiness by examining:
- Income documents
- Tax returns
- Employment history
- Credit information
- Next, the servicer will approve a loan for a specific amount.
- Finally, you’ll close on the loan by signing documents and paying a down payment and a variety of fees, like:
- Title search fees
- Loan origination fees
- Other closing costs
You’ll want to express your interest in a green mortgage before or during the refinancing process. Like a new home loan, an eco-mortgage may be rolled into the refinanced loan upon approval for both, so you’ll only have to make one payment per month to one loan servicer.
Types of Energy Efficient Mortgages
There are three types of energy-efficient mortgages available as of 2022—conventional loans, Federal Housing Administration (FHA) loans, and Veterans Affairs (VA) loans. Let’s break down each type in more detail.
#1 Conventional Energy-Efficient Mortgages
Current or future home buyers can secure a conventional energy-efficient mortgage from various loan servicers—including the companies providing mortgage pre-approval.
Conventional loans are regulated via one of two programs:
- Fannie Mae’s HomeStyle Energy mortgage program
- Freddie Mac’s GreenCHOICE mortgage program
Both programs have generally lenient qualification requirements. This allows them to provide opportunities for people with manually underwritten loans, high debt-to-income ratios, and high expense-to-income ratios.
However, individual loan servicers determine how much applicants can borrow, and approval processes can vary by lender.
#2 FHA Energy-Efficient Mortgage
The Federal Housing Administration (FHA) offers low-cost, insured mortgage loans and energy-efficient mortgages to both home purchasers and refinancers.
To qualify, applicants for an FHA green mortgage must:
- Secure approval for a primary mortgage loan from the FHA
- Prove the cost-effectiveness of their intended improvements
- Complete a home energy assessment to optimize the efficiency of projects funded
Once they are approved, FHA borrowers can receive a loan amount up to the lesser of each option:
- The cost estimate derived from the home energy assessment
- 5% of the:
- Adjusted value
- 115% of the median area home price
- 150% of the national conforming mortgage limit
FHA loans can have numerous requirements, but they’re generally a low-cost alternative to traditional lending.
#3 VA Energy-Efficient Mortgage
If you have a history of current or past military employment, service, or time spent in reserve, you may qualify for a VA energy-efficient mortgage. The US Department of Veterans Affairs (the VA) offers both:
- Home purchasing mortgages
- Home refinance mortgages
A VA energy-efficient mortgage can be rolled into either of the loan products above. In addition to their employment record, applicants must meet various criteria to qualify for a VA loan.
The VA issues loans of various sizes, but green loans must:
- Be based upon documented improvement costs (for loans up to $3,000)
- Not produce monthly loan payments more costly than future reduced energy costs (for loans up to $6,000)
- Correspond with a home value determination completed by the VA (for loans over $6,000)
Benefits of Energy-Efficient Mortgages
If you’re considering using an energy-efficient mortgage to afford a more eco-friendly home, it can help to weigh the pros and cons before deciding. Green loans offer a variety of benefits for current or future homeowners:
- Interest rates are low – Lenders typically provide low interest rates if you pursue a conventional, FHA, or VA energy-efficient loan. They can because their investment is protected by the energy efficiency improvements, you’ll complete once you receive the funds.
- You can borrow more than the property is worth – With both purchase and refinance loans, eco-mortgages can increase your loan size—even if the property isn’t currently worth the loan amount you need.
- Overall cost savings – Energy-efficient loans can help you decrease your home energy costs, potentially leading to long-term savings. In addition, when you fund eco-friendly home upgrades with an energy-efficient mortgage, you’re likely choosing the lowest-interest financing option available for home improvements.
Drawbacks of Energy-Efficient Mortgages
Even if the benefits interest you, energy-efficient mortgages might not be right for every homebuyer or refinancer. Consider the following possible drawbacks before signing on the dotted line:
- Interest could cancel out savings – While interest rates are generally low for green mortgages, monthly interest payments could still cancel out your monthly energy savings until you’ve completely paid off your mortgage. Calculate your interest and predicted savings carefully before you close.
- Efficiency upgrades can vary widely in cost – Unless you complete a home energy assessment beforehand, it can be difficult to determine how much money you’ll spend on energy-efficient upgrades. Try to develop as clear a picture as possible of your upgrade costs before requesting a loan amount.
- You may face additional red tape – Especially if you apply for an FHA or VA loan, you might need to complete additional procedures or have to provide extra documentation to apply for a green mortgage.
Is an Energy-Efficient Mortgage Right for You?
So, should you pursue a green mortgage? The answer may be different for everyone. But if any of the following circumstances apply to you, an energy-efficient mortgage could be worth pursuing.
You might want a green mortgage if you’re a current homeowner and one or more of the following is true:
- You’re saving some money each month
- Interest rates are generally lower than they were when you bought your home
- You plan to stay in your current home for the next year
But they could also be worth pursuing if you’re currently searching the market for a new home and:
- You want to purchase the most efficient home possible
- You’re willing to invest time and money to improve your home’s efficiency
Ultimately, energy-efficient mortgages can be an excellent solution for homeowners (current or prospective) who want to reduce their properties’ carbon footprints.
Aspiration: Green Money Management And More
The climate finance movement has mobilized multiple sectors to reduce emissions. Green mortgages can help you secure or create your dream energy-efficient home. But, they’re not the only environmentally responsible financial product on the market today.
Enter Aspiration—the money management solution that prioritizes you and the planet.
Unlike traditional financial institutions, we never use your hard-earned deposits to finance non-renewable energy projects. Instead, our sustainable financial services fund the innovators of the future, developing the green tech that will reverse climate change for good.
When you’re ready to use your wallet for good, Aspiration is here to help.
Forbes. Your One-Stop Shop for Green Loans. https://www.forbes.com/advisor/personal-loans/green-loan/
Investopedia. 5 Things You Need to Be Pre-approved for a Mortgage. https://www.investopedia.com/financial-edge/0411/5-things-you-need-to-be-pre-approved-for-a-mortgage.aspx
Energy Star. Energy Efficient Mortgages. https://www.energystar.gov/newhomes/mortgage_lending_programs/energy_efficient_mortgages
US Department of Housing and Urban Development. Energy Efficient Mortgage Program. https://www.hud.gov/program_offices/housing/sfh/eem/energy-r