DOE’s Home Energy Score and FHA Mortgages: New Tools to Help You Shop for and Buy an Energy Efficient House
Did you know that the average homeowner spends more than $2,000 each year on energy? Utility costs are a significant part of the cost of homeownership, yet most consumers have little if any information about how much utility bills are likely to be when they buy a house.
If you buy a newly built home in the United States, there’s a 1 in 3 chance that it comes with an energy label comparing it to energy code. But up until now it’s been hard to find out how efficient an existing home is. A new partnership between the U.S. Department of Housing and Urban Development (HUD) and U.S. Department of Energy (DOE) is changing that. A new policy, effective January 25th, extends the Federal Housing Administration’s (FHA’s) Energy Efficient Homes (EEH) policy – historically limited to new homes – to existing homes.
What Does This Mean for Homebuyers?
Savvy consumers shopping for a home want to know how much a home’s utility bills are likely to be. Now buyers can have their real estate agent request a Home Energy Score (Score) from the seller or have a home scored during inspection. A number of multiple listing services (MLSs) allow agents to search for homes that have a Score -- a standard home energy rating administered by the U.S. Department of Energy. The majority of MLSs will include this feature within the next two years.
The Home Energy Score is a simple, low cost, easy-to-understand rating for existing homes, similar to a “miles per gallon” sticker for cars. The Score is offered by home inspectors and other qualified assessors, as well as by some state and utility programs at a reduced fee.
How Can the Score Help Homebuyers Qualify for Loans on Existing Homes?
This new policy and system spells loan opportunities for homeowners too.
Under FHA’s standard underwriting criteria, borrowers can borrow up to 31 percent of their income for mortgage payments (principal, interest, taxes and insurance), or up to 43 percent of all debt. Under the new policy, FHA borrowers can qualify for a two percent “stretch ratio” if they buy an energy-efficient home (or refinance an existing mortgage) that scores at least a 6 on DOE’s 1-to-10 Home Energy Score scale. With the stretch ratio for energy efficient homes, lenders can “stretch” the qualifying ratios to 33 percent and 45 percent respectively.
For example, a homebuyer with an income of $75,000 who currently qualifies for a monthly mortgage payment of $1,938 per month can now borrow an extra $125 per month for a more energy efficient home. Financed with a 30-year mortgage at today’s rates, the homebuyer can now qualify for a house valued at approximately $26,500 more than a less efficient house.
The new policy will help any buyer considering a home just above their standard borrowing limit. Furthermore, the policy signals to lenders that they can use the Home Energy Score as a proxy for expected utility costs. A home with a score of 6 or higher is expected to have lower than average utility costs, since a “5” equates to a home with average utility costs for that area. Lower utility costs means lower monthly expenses, thereby allowing borrowers to spend more toward the cost of the house.
The Home Energy Score is currently only available in areas served by an official Home Energy Score Partner. Some Partners offer services throughout the U.S. Homeowners should contact their local Partner, or a national Partner, to schedule a Home Energy Score.
What about New Homes?
Homebuyers can already qualify for the EEH stretch ratios when buying a newly built home that meets energy code. For new homes to qualify for the EEH stretch ratio, the house must meet or exceed the efficiency of the most rigid of the following codes—2006 IECC , the latest energy code adopted by HUD, or the prevailing state or local code.
In contrast to the Home Energy Score, the Home Energy Rating System (HERS) is widely used for new homes; some 146,000 homes received a HERS rating in 2014—about a third of all new home sales. The HERS rating compares a home to 2006 IECC – that is, how will the home perform relative to a similar home built to that code.
How Does the EEH Policy Complement Other FHA Programs?
EEH stretch ratios can be applied across FHA’s Title II forward mortgage products and programs, including its primary loan programs –203(k) and 203(b). Lenders must manually underwrite EEH mortgages whether for new or existing homes. Eventually, with sufficient data, we hope that these loans can be approved using FHA’s automated underwriting system, known as TOTAL Scorecard.
The qualifying ratios available through the EEH policy add to a range of FHA products that support energy efficiency, including the Energy Efficient Mortgage (EEM), which allows homebuyers to borrow up to 5 percent over the appraised value for energy efficiency improvements. An energy assessment performed by a home energy rater certified by the Residential Energy Services Network (RESNET) or the Building Professional Institute (BPI) must demonstrate the cost-effectiveness of the planned investments. Combined with other innovative industry efforts to bring greater transparency to the “green features” of a home, these tools can help consumers make a more informed choice when they buy a house, and provide an incentive to buy a more affordable, energy efficient house.