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Green builders who want the best financing along with appraisals that reflect the true value of their homes will have to go the extra mile to educate lenders about energy efficient mortgages and teach appraisers about green homes, Dave Porter, owner of PorterWorks in Stanwood, Wash., told a Jan. 12 NAHB International Builders’ Show seminar in Orlando.
“You must use common language when talking to appraisers and lenders,” Porter said. “Avoid industry abbreviations such as ‘NGBS,’ ‘R-factor,’ ‘VOM’ and ‘VOD.’ Define your words and phrases.”
Porter said that a lack of appraisal training, particularly in green building, can create “havoc” and he told builders they need to “demand competency” in this area.
“If an appraiser is not knowledgeable, the lender should not give the appraiser that assignment,” he said.
To help appraisers reach a correct value, Porter said that builders, lenders and real estate professionals should provide documentation on all of the energy-efficient features in the home, including those not readily visible, such as blown-in insulation.
While acknowledging that there is “no such thing as a green mortgage,” Porter said that the Federal Housing Administration (FHA), the Department of Veterans Affairs, Fannie Mae and Freddie Mac do offer various versions of energy efficient mortgages to help offset the costs of purchasing a new green home and for retrofits to existing homes. (For specific information on these mortgages, click here.)
An energy efficient mortgage — or EEM — is geared primarily toward new housing and helps home buyers or home owners save money on utility bills by enabling them to finance the cost of adding efficiency features as part of their home purchase or refinancing mortgage.
EEMs recognize that reduced utility expenses can permit a home owner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage, he said.
For example, FHA EEMs provide mortgage insurance to purchase or refinance a principal residence and incorporate the cost of energy-efficient improvements into the loan amount. The borrower does not have to qualify for the additional money and does not make a downpayment on it. The mortgage loan is funded by a lending institution — such as a mortgage company, bank or savings and loan association — and the mortgage is insured by the FHA (which does not provide loans).
Energy improvement mortgages — or EIMs — are used to purchase existing homes that will have energy efficiency improvements made to them. EIMs allow borrowers to include the cost of retrofitting an existing home in the mortgage without increasing the downpayment. EIMs allow the borrower to use the money saved in utility bills to finance energy improvements.
According to Energy Star, both EEMs and EIMs typically require a home energy rating to provide the lender with the estimated monthly energy savings and the value of the energy efficiency measures — known as the Energy Savings Value.
While these programs have been around for some time, Porter said most lenders are not offering them because they don’t know enough about them and there is a general perception that the process is too complicated.
With 128 million existing homes in the U.S. today and 95 million in need of some type of retrofit, Porter said that more lenders need to take a home’s energy efficiency into account when qualifying a borrower.
“If I buy a 1968 home that costs $450 per month to heat versus an Energy Star that costs $100, why isn’t that considered in the overall home payment?” he asked. “Lenders are thinking in terms of PITIUM — principal, interest, taxes, utilities and maintenance — but not average energy costs. I think we need to change the system.”
To move this process forward, Porter suggested that green builders pursue the following action items:
- Get their Multiple Listing Service to go green by working with their local home builders association and Realtors® association.
- Insist that lenders present them with details on EEMs, which will also force the lending institution to learn about such products.
- Prepare detailed information packages for appraisers — and demand competency.