Mortgage loans with a green touch
If you’ve been looking for a way to pay for energy improvements to your house, two little-publicized new mortgage programs could provide you the cash you need.
Both the Federal Housing Administration and mortgage investor Fannie Mae recently have launched startups in the energy conservation arena. Here’s a quick overview, with some pros and cons:
FHA’s new program is called “PowerSaver” and allows eligible owners to borrow up to $25,000 at fixed rates between 5 percent and 7 percent for as long as 20 years to finance high-efficiency windows and doors, heating and ventilating systems, solar panels, geothermal systems, insulation and duct sealing, among other retrofits.
Though officially a pilot program, HUD Secretary Shaun Donovan estimates that 30,000 PowerSaver loans will be closed in the next two years. It eventually could become a major national program for residential energy upgrades, with total loans extending into “the millions,” he said.
One important element in the program: energy audits. Although they won’t be mandatory, most participating lenders are expected to encourage owners to sign up for an energy efficiency analysis by a certified specialist. The audit should pinpoint where your house is leaky or otherwise inefficient in energy use, and should recommend the specific types of upgrades or additions that could help cut your bills and reduce greenhouse emissions.
FHA will insure loans to cover the improvements up to the $25,000 maximum under the following guidelines:
— The house must be your principal residence, detached and single-family only. No rentals, no investor homes, no second homes.
— You’ll need to demonstrate that you are a solid credit risk. Minimum FICO credit scores of 660 are required, plus your total household monthly debt-to-income ratio cannot exceed 45 percent.
— Houses with negative equity will not qualify. You’ll need some level of equity in the property; there is no mandatory minimum stake, but the combined primary mortgage debt plus the PowerSaver second lien cannot exceed 100 percent of the appraised market value of the house. You could, for example, have a 10 percent equity position in a $200,000 home, and still qualify for up to $20,000 in a PowerSaver.
— Lenders are likely to take an extra hard look at all your income and asset documentation because, unlike other FHA-insured mortgages, PowerSavers will only cover 90 percent of the lender’s loss or insurance claim in the event of a default.
Eighteen lenders around the country have signed up so far to participate, ranging from giant Quicken Loans — a top 10 national mortgage originator — to regional and local players such as California-based Sun West Mortgage, Seattle’s HomeStreet Bank, the Bank of Colorado, Stonegate Mortgage in the Midwest, Pennsylvania-based AFC First Financial Corp., and the University of Virginia Community Credit Union. A spokesperson for Quicken Loans said the company hopes to offer PowerSaver in as many as 34 states during the pilot period.
Some pros and cons of PowerSaver: The biggest plus is its low fixed interest rate and long term — especially in comparison with most homeowners’ alternative options such as bank home equity loans and lines of credit, which typically cost more and may have less favorable payback terms. The main potential drawback: Since the program permits total household mortgage debt loads of up to 100 percent of market value, there’s the chance that some borrowers could encounter payment problems if they experience even slight income declines or if property values in the area decrease, putting them into negative equity territory.
Fannie Mae’s “energy improvement” mortgage add-on program is significantly different from FHA’s. Rather than a separate loan to finance the energy retrofits, Fannie folds the cost of the improvements — capped at up to 10 percent of the estimated market value of the home following the energy efficiency enhancements — into the mortgage amount itself.
In effect, Fannie’s program, which is now available through participating lenders nationwide, allows you to purchase an existing house and improve its energy usage significantly with one mortgage at current market rates. Most single-family properties are eligible for the program, except for manufactured houses and cooperative units.
Be aware that Fannie requires an audit by a certified Home Energy Rating Systems expert upfront to justify the proposed modifications to the house as truly cost-efficient. The HERS audit must be paid for by the borrower, but Fannie will credit an extra $250 through the lenders to partially defray this expense.
Ken Harney is a real estate columnist with the Washington Post.