Loan Modification

FHA ?GREEN? Mortgages On Horizon

By Peter G. Miller

Given all the yelling and screaming in Washington, I am happy to report a bit of bi-partisanship: On April 22nd, Earth Day, the House Financial Services Committee approved H.R. 2336, the GREEN Act, a bill that would add a large number of affordable FHA loans to the housing mix. Next it needs to be considered by the full House and then by the Senate.

It’s a linguistic stretch but the “GREEN” in GREEN Act stands for “Green Resources for Energy Efficient Neighborhoods.” The bipartisan measure was co-sponsored by Rep. Ed Perlmutter (D-CO) and Rep. Judy Biggert (R-IL), among others.

According to the Committee, part of the legislation “directs HUD to establish a four-year, 50,000-unit demonstration program to highlight the cost effectiveness of funding a portion of the costs of meeting the enhanced HUD energy efficiency standards. In addition, the Federal Housing Authority (FHA) is encouraged to insure at least 50,000 energy efficient mortgages by December 31, 2012. As FHA begins seeking these types of mortgages, a market will emerge among homebuilders, home owners and lenders seeking to acquire federal insurance on mortgage products.”

Translation: The bill is an effort to push out 100,000 additional FHA mortgages.

Energy Efficient Mortgages

For many years FHA loan guidelines have included a program known as the Energy Efficient Mortgage or EEM. It’s an FHA with 3.5 percent down and can be used for properties with one to four units providing at least one unit is owner-occupied.

The usual FHA qualification ratios are 31/43 — meaning that up to 31 percent of your income can be used for mortgage principal and interest, property taxes and property insurance. The “back” ratio, that 43, refers to the front ratio (the 31) plus regular monthly expenses for car payments, credit cards, student loans, etc.

However, with an EEM, the FHA guidelines are stretched to 33/45. The reason that higher ratios are allowed is that borrowers are expected to have additional money from the savings associated with energy efficient homes and appliances.

What Qualifies?

HUD explains that borrowers can get an EEM under the following conditions:

The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the lesser of A or B as follows:

A. The dollar amount of cost-effective energy improvements, plus cost of report and inspections, or

B. The lesser of 5% of:

___ The value of the property, or

___ 115% of the median area price of a single family dwelling, or

___ 150% of the conforming Freddie Mac limit.

“To be eligible for inclusion in the mortgage,” HUD continues, “the energy efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.

“The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating report that is prepared by an energy consultant using a Home Energy Rating System (HERS). The cost of the energy rating report and inspections may be financed as part of the cost effective energy package.

“The energy improvements are installed after the loan closes. The lender will place the money in an escrow account. The money will be released to the borrower after an inspection verifies that the improvements are installed and the energy savings will be achieved.”

For specifics, speak with a lender who specializes in FHA financing — and keep your eyes open for new efforts to push such financing.

Full post as published by FHA Mortgage Guide on April 27, 2010 (boomark / email).