Save the environment and your wallet with a green mortgage from the FHA

If you're into going green in your dream home, you can get special financing to help with your property purchase. Whether you find a house you like and the property inspection reveals that it falls short on energy efficiency or you're simply trying to reduce your carbon footprint, opting for environmentally friendly appliances and other home features is also beneficial for your finances.

What are energy efficient mortgages?

The Federal Housing Administration offers what is known as the Energy Efficient Mortgage program. This type of financing is available for home buyers and owners who want to make green improvements to an existing property or purchase a new home with such features. They are able to finance the installation costs as part of their FHA insured home purchase or refinancing loan.

The EEM program was first piloted in only five states in 1992 and expanded to all states in 1995. The loans are provided through lenders, such as banks, credit unions and mortgage companies, and the FHA insures them.

How can you qualify for the EEM program?

To get financing for your green home, you must meet the FHA's standard Section 203(b) insurance requirements for FHA loans. This includes an ability to show that you have the means to make monthly mortgage payments. You may also be eligible under the FHA's Section 203(h) program, which provides financing for victims of presidentially declared disasters. This program is specific to one-unit, detached properties, and you must meet both the EEM and Section 203(h) requirements.

To determine if your current or prospective property is qualified, the FHA will use an energy consultant or the home energy rating system. Through these means, the administration will estimate the cost of the updates and expected energy savings.

Here are additional requirements of the EEM program:

• You have to provide a 3.5 percent down payment, per the FHA financing requirements.
• Mortgage insurance, which can be added to your loan amount, is also required.
• The improvements must meet the definition of cost effective. This means that the overall cost for the upgrades has to be exceeded by "the energy saved over the useful life of the energy improvement," the FHA said.
• Properties must be between one and four units.
• There are two ways that your cost can be covered by the financing. The first is the lesser of 5 percent of: 150 percent of the Freddie Mac conforming loan limit, the value of the property or 115 percent of the median area price for a single-family home. The second is the dollar amount of reports, inspections and the cost-effective energy improvements.
• The installation has to occur after you close the loan, and the funds will be held by the lender in an escrow account until a property inspection can verify the installation.

What are the benefits of an EEM mortgage?
The most obvious advantage of green financing is that you can make your current or prospective home more energy efficient. In the long run, you stand to save a lot on your electric bill. In that same vein, you save money on your down payment via the FHA's low down payment requirement.

The financing is also advantageous because you can get a mortgage for an amount that would normally be out of your reach based on your debt-to-income ratio as long as the extra funds are for the improvements. This can be a more strategic way to pay for green updates compared to using a credit card or savings, as you can deduct the interest you pay as part of your mortgage interest payment tax deduction.