Energy-efficient mortgage: what it is and how to get one

What is an energy-efficient mortgage?

An EEM is a lot like any other type of home loan, except that it is geared toward homeowners who are interested in energy efficiency. These loans can be used to buy or refinance a home that already meets energy-efficiency standards or that will meet them after improvements are made.

Generally speaking, green home loans let homeowners or homebuyers finance more than the purchase price of a home and use excess funds to pay for energy-efficient upgrades. EEMs may have high monthly payments and total loan costs, but homeowners can recoup these expenses (and then some) by paying lower energy costs during the years they own the home.

Eligible green upgrades can include solar panels, wind power, insulation and even new windows and doors that improve energy efficiency. Ultimately, the improvements that qualify for financing through an EEM can vary based on the home itself, the area the home is located in and other factors.

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How does an energy-efficient mortgage work?

Dennis Shirshikov, the head of growth for real estate investing platform Awning, says lenders typically look at a borrower's credit history, income stability and debt-to-income ratio when they apply for a green mortgage.

One unique aspect of an EEM is that the borrower's home must be assessed by a third-party home energy rater to identify potential energy-saving improvements.

Depending on the loan type, homeowners or homebuyers can typically borrow up to 15% of a home's projected post-upgrade value to make energy-efficient improvements. Lenders considering a green mortgage application will also estimate the potential savings that green energy upgrades will yield for the homeowner over time.

Lenders may allow a homeowner to execute some of the financed energy upgrades independently, but the homeowner can't pay themselves for the labor involved. Funds from an EEM can only be used to pay for materials and work done by certified contractors for energy-efficient upgrades.

A homeowner typically has three to six months to complete the recommended upgrades for a green mortgage, depending on their lender and mortgage type. After the upgrades are completed, an inspection is required to receive a disbursement of the loan funds meant for reimbursement.

However, sometimes homeowners use an EEM to purchase a home that already demonstrates energy efficiency. In this scenario, a home energy rater still needs to assess the home to determine its eligibility based on the amount of energy savings the homeowner will likely benefit from.

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Types of energy-efficient mortgages

Green mortgages can come in many different forms, which is good news for borrowers who want to improve their energy efficiency without missing out on home loan benefits they may be eligible for. Here's a rundown of the types of EEMs you'll find today:

Energy-efficient mortgage requirements

Shirshikov says you'll typically see things like energy-efficient windows, insulation and heating, ventilation and air conditioning systems count toward green mortgage eligibility. But he also noted that anything that can directly contribute to reducing energy consumption "could be a go."

However, something like a luxury swimming pool heater typically won’t make the cut, he says.

Ultimately, you'll find out which energy-efficient upgrades qualify for an EEM when your home is assessed by an energy rater. These assessments verify for the lender that a home will become more energy efficient after renovations are complete. They also provide the lender with the home’s projected Energy Savings Value, i.e., the estimate of the monthly energy savings the homebuyer can expect from their upgrades.

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Pros and cons of an energy-efficient mortgage

Getting a green mortgage requires a few more steps than getting a regular mortgage, especially when you consider that your home has to be assessed by a qualified energy rater. That said, there are notable benefits that can come with getting an EEM.

Consider these pros and cons before you decide if it's worth it or not.

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Where to get an energy-efficient mortgage

Shirshikov says that the internet is a treasure trove when it comes to finding lenders that will work with you on an EEM, as well as obtaining general information on the home upgrades you might want or need.

"There's a plethora of information available, from government websites to forums and blogs dedicated to green housing initiatives," he said.

Both conventional and guaranteed green mortgages are available from many different mortgage lenders, though options vary from lender to lender. To find an FHA EEM, you can check out the Lender List provided by the U.S. Department of Housing and Urban Development, or you can read our guide to FHA lenders. Our guide to VA lenders can also help you find out which lenders offer VA loans for energy-efficient upgrades.

Bottom line

EEMs are home loans that let you finance specific home improvements, and they can apply to purchase loans and refinance loans. These loans can be conventional mortgages or mortgages guaranteed by the FHA, the VA or the USDA.

Each type of green mortgage has its own rules and borrowing limits, so you'll want to speak with a mortgage lender to find out which requirements apply to the mortgage you’re interested in. If you can find a way to make one of these mortgages work, it can substantially reduce your environmental impact, and the money you save on utility bills can be well worth the extra effort.