How Energy-Efficient Mortgages Work

Environmentally sensitive homes aren’t just for tree huggers any more.

March 1, 2003

Houses that meet prescribed energy standards can qualify for favorable mortgage terms, ranging from higher borrowing limits with little or no downpayment to cash-back features. They can be used to purchase a new or existing home or to finance energy-related improvements. The FHA, VA, Fannie Mae, and Freddie Mac all sponsor energy-efficient mortgages (EEMs) for homes that are certified as energy efficient by an accredited energy rating system or independent consultant. These mortgages allow consumers to buy more home--either through a traditional 2 percent stretch, which adds energy savings to income to qualify buyers for 2 percent more debt, or through flexible loan-to-value ratios of up to 100 percent of home value. There are standard EEMs with no upper income restrictions and ones for borrowers who are at or below 100 percent of area median income.

Energy improvement mortgages allow buyers of older homes to roll the costs of making energy improvements right into the mortgage. An energy rater inspects the property and recommends cost-effective improvements—perhaps replacing electric baseboards with a forced air gas furnace or older aluminum single-pane windows with vinyl. The lender places the money for those improvements into an escrow account, and when they are made another energy rating is taken. If the work was performed satisfactorily, the funds are released to pay for the work. For specifics on loan requirements and terms, go to the Web sites of the various mortgage sponsors including Fannie Mae, Freddie Mac,, the FHA,, and the VA,

“Energy mortgages are a great benefit to all parties in a transaction,” says Geri Morgan, ABR, CRS, GRI, of Coldwell Banker Koetje Real Estate in Oak Harbor, Wash. “Buyers can afford the house they want, sellers have a desirable feature to market in their property, and agents can earn higher commissions because they are selling more expensive homes.”

If you’re interested in helping buyers qualify for green mortgages, get to know the green lenders in your area, Glenn advises. For a list of participating lenders in each state, consult the Residential Energy Services Network (RESNET) Web site,

Energy Rating Systems

Energy Rated Homes of America. ERHA is a national home energy rating system with member programs in 16 states. Its ratings are recognized by Fannie Mae, Freddie Mac, FHA, and VA. It has partnerships with Chase Manhattan Mortgage, GMAC Mortgage, and other national primary lenders to offer preferred financing for homes that are certified by ERHA to be energy efficient.

Home Energy Rating System. As part of the 1992 Energy Policy Act, Congress mandated the U.S. Department of Energy, HUD, and the mortgage industry to develop a nationally recognized system for measuring the energy performance of new and existing dwellings. The result was HERS. This system is based on the Model Energy Code and is one of the most widely used methods of rating energy efficiency in homes.

National Energy Raters Association. Members are professional home energy raters and consultants.

Residential Energy Services Network. A partnership between the national mortgage industry, Energy Rated Homes of America, and the National Association of State Energy Officials. RESNET’s mission is to improve the energy efficiency of the nation’s housing stock by expanding the availability of mortgage financing options and home energy ratings. It is a national network of mortgage companies, real estate brokerages, builders, appraisers, and utilities.

Energy and Environmental Building Association. A national membership organization that includes architects, builders, developers, manufacturers, engineers, utilities, code officials, researchers, educators, and environmentalists.

U.S. Green Building Council. Representing all segments of the building industry, USGBC is working to change the way buildings are designed, constructed, and maintained. It has developed a voluntary green building rating system called LEED ™ (Leadership in Energy and Environmental Design). This system evaluates not just energy efficiency, but also site development practices, water management, materials selection, indoor air quality and other issues. The LEED rating was designed for commercial buildings and was recently expanded to the residential sector. Some states and government agencies have mandated that all new taxpayer-funded buildings meet LEED standards.

Additional Resources

Green Housing, Paul Sedan, May 2001.
How Green is Your Home, Robert Freedman, May 2001.

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