Mid-West Ohio Energy & Environmental Consulting

What is an Energy Efficient Mortgage (EEM)? The EEM was developed by the lending industry to give the builder/buyer of an energy efficient home credit for the fact that the home will have lower energy bills than a typical home. The program is typically used for new energy efficient homes, but can also be used for existing homes that are already energy efficient.

An Energy Efficient Mortgage allows a lender to stretch both the housing debt-to-income ratio and the total debt-to-income ratio by two percentage points. These ratios are typically 28% and 36% respectively. This two percent stretch increases those qualifying ratios to 30% and 38% respectively. Let's look at an example of the effect that this has.

You have clients that come in and want to purchase one of the nice new three bedroom homes at the edge of town. They have a choice of two different builders. One builds a good house but with little effort to make it energy efficient. The second builder has invested time and materials to provide clients with homes that can be documented as more comfortable and energy efficient through a home energy rating. The conventional home costs $100,000. The energy efficient home costs $105,000 (stretched for effect, energy efficiency typically add 2-3% to the cost of a new home). Both look about the same and have the same amenities. The customer will probably be drawn to the home that costs five thousand dollars less, but is that their best investment and will they be able to qualify?

Looking at the table below, we see that the monthly Principal Interest Taxes & Insurance (PITI) for the energy efficient home goes up $33 per month. However, when we compare energy bills, the energy efficient home has $87 dollar lower utility costs. It costs your clients less each month to own the energy efficient home right from day one. $54 dollars isn't exactly winning the lottery, but their mortgage payment will remain the same for the next thirty years. Can you guarantee their utility bills will remain the same for thirty years? Lets not forget the positive cash flow will be even greater when you consider that mortgage interest is tax deductible and energy costs are not!

The bigger difference shows up in the income needed to qualify. The conventional house requires a monthly income of $3,063, whereas the energy efficient home only requires a monthly income of $2,922. That's over $140 less per month or nearly $1,700 per year less income needed to qualify. Energy Efficient Mortgages open new houses up to more and more people.