While you are reading this I will be recovering from a long week at California Association of Realtors Directors Meetings in Sacramento, along with a handful of other Directors from the Lodi Association of Realtors. We are seemingly doing battle with our Government, Lenders and others to try and protect your private property rights. We are also working to help make affordable financing available for you to have access to the American Dream of Home Ownership and doing what we can to help implement policies that make sense to help us all conserve energy and to save money.
Let’s face it, everything seems to be getting more expensive — from gasoline to groceries. Who knows what is going to happen in the future? The only thing that doesn’t seem to be increasing is our paycheck. We all need to do what we can to save money and tighten our budget belts. One thing that we can all do to save money is to make improvements to our homes and make them more energy efficient. The question then becomes how to pay for these home energy improvements and what improvements should I make that will really benefit me.
Kenneth R. Harney reported from Washington that if you’ve been looking for a way to pay for energy improvements to your house, two little-publicized new mortgage programs could provide the cash you need. Both the Federal Housing Administration and mortgage investor Fannie Mae recently have launched options in the energy conservation arena. Here’s a quick overview, with some pros and cons.
The FHA’s PowerSaver program 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. Officially a pilot program, Shaun Donovan, secretary of Housing and Urban Development, estimates that 30,000 such 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 is energy audits. They won’t be mandatory, but most participating lenders are expected to encourage owners to sign up for an energy efficiency analysis by a certified specialist. The audit will pinpoint where your house is leaky or otherwise inefficient in energy use, and will recommend the specific types of upgrades or additions that could help cut your bills and reduce greenhouse emissions.
The 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, PowerSaver will cover only 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.
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 drawbacks center on the program permitting total household mortgage debt loads of up to 100 percent of market value. If property values in the area decrease, the loans could put owners into negative equity territory.
Fannie Mae’s “energy improvement” mortgage add-on program is significantly different from the 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 available through participating lenders nationwide, allows you to buy 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. 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 audit must be paid by the borrower, but Fannie will credit an extra $250 through the lenders to partially defray this expense.
Energy efficiency and Energy Audits are going to become a hot topic, especially here in California. There are a number of companies and programs already available to help you find out what could be done to your home to help reduce your monthly expenses. Talk to your local Realtor who should be able to help you know your options.
Questions and comments can be made to Kerry Suess at firstname.lastname@example.org