Here’s another advantage to installing energy improvements in your home. Not only are you helping the environment and saving money, you can boost your loan affordability. Many conventional and government-insured mortgage programs allow debt-to-income (DTI) ratios to expand by two percentage points for borrowers who install energy-efficient features in their home. For applicants earning around $50,000 annually, a two-percent difference can stretch your loan from $200,000 to $217,000.
Some lenders will add projected monthly utility cost savings to a borrower’s mortgage-qualifying income. Monthly savings projections are calculated by a professional energy rater who completes testing on the property in accordance with the U.S. Department of Energy (DOE), or the Home Energy Rating System (HERS). A home with an Energy Star® rating also qualifies for loan underwriting flexibilities.
With a Freddie Mac GreenCHOICE® or a Fannie Mae Homestyle® Energy mortgage, home buyers can finance up to 15% of the “as completed” property value to cover the cost of energy improvements. As long as the property appraiser supports the increase in value, 15% can go a long way. Eligible improvements include features such as: solar panels, photovoltaic systems, water-efficiency systems, energy-efficient windows, and high-performance energy homes.
Energy-efficient mortgages are available on many property types, including condominiums, townhouses and 2-4 residential properties. Manufactured homes are eligible, as long as the improvements require no structural changes.
Energy reports are not required for smaller projects to install basic energy improvements, weatherization, storm barriers, etc. Both FHA and Fannie Mae allow $3,500 without a report, Freddie Mac allows $6,500, and for VA loans, reports are not required for loans under $6,000.
The U.S. Department of Energy provides an interactive tool on their energy.gov website called “Tax Credits, Rebates, and Savings.” This tool allows consumers to search for programs in any state, and queries can be filtered by specific energy-efficient feature, such as: solar photovoltaics, solar space-heating, solar water-heating, wind turbines, geothermal electric, lighting systems, thermostats, hydro-electric power, windows, insulation, and home appliances.
Across the country, many state-chartered housing finance agencies offer energy-improvement grants and/or loans to homeowners. Grants are typically in the $2,500 to $4,000 range, and require no repayment. Loan amounts can be much higher, and are often at zero-percent–or at a very low rate of interest. Usually, loans are paid when the homeowner sells the home or refinances their mortgage.
The home-buying journey is a long process, and many people spend years just saving for the down payment. Because of the long-term financial benefit of energy improvements, it’s almost like your house is paying you back. Mother Nature approves.