Energy Efficient Mortgages & HERS Ratings. Peter V. Vargo Nu-Tech Energy Solutions, Co LLC

Transcription

1 Energy Efficient Mortgages & HERS Ratings Peter V. Vargo Nu-Tech Energy Solutions, Co LLC PA Housing & Land Development Conference February 20, 2013

2 Energy Efficient Mortgages & HERS Ratings Peter V. Vargo Nu-Tech Energy Solutions, Co LLC Energy Efficient Mortgages (EEM s) What are EEM s? Who is eligible? What are the benefits? How do EEM s work? How to add to your business model. 1

3 What is an EEM? An Energy Efficient Mortgage (EEM) is a mortgage that credits a home's energy efficiency in the mortgage itself. EEMs give borrowers the opportunity to finance cost-effective, energysaving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans thereby allowing borrowers to qualify for a larger loan amount and more energy-efficient home. EEM s EEMs can be applied to existing and newly constructed homes. Allows borrower to finance all or a portion of the expense of a cost-effective energy package. 2

4 EEM s Allows borrower to have more free cash flow each month, via utility bill savings, that can be applied to mortgage payment,. Hence, the loan limit can be exceeded by the $amount of the cost effective energy improvements, without the need for additional financing or extra downpayment. EEM s No need for a second appraisal that reflects the energy package or improvements. Improvements may be applied to retrofit an existing home or to improve the energy efficiency of proposed construction. Present Value calculations of energy savings must be used in lieu of actual energy savings. 3

5 EEM s Eligibility Present value The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. EEM s The Perfect Storm Part I Low interest and savings rates. - This allows us to use a lower discount rate in our Present Value calculations of the energy improvements which potentially qualifies more energy improvements. Potentially gives the borrower a better rate of return on their money and provides additional monthly free cash flow. 4

6 EEM s The Perfect Storm Part II Low Mortgage Rates - Low rates mean lower monthly payments, so the free cash flow from the energy savings can more than offset the increase in mortgage payment. - As rates move up this gets incrementally more difficult. At 8% the dynamic starts to shift. EEM Eligibility Existing Homes Single family dwellings, 1-4 units, including townhomes and 1 unit condos (under certain circumstances). Can be used as an overlay with weatherization (Ref: A.5.d-g) Can be used with a 203k mortgage (HUD form 92700) 5

7 EEM Eligibility Existing Homes Cash out Refi s not permitted. HECM s are not permitted (Reverse Mortgage). EEM s Eligibility FHA Loans - New Construction - Existing Home Purchases - Refi s 6

8 EEM s Eligibility VA Loans - Purchase of Existing Dwelling - Or Refinancing EEM Requires HERS Rater All EEM s require a plan rating or test-in, analysis, inspections, test-out, & documented by a Certified HERS Rater. HERS (Home Energy Rating System) Must use DOE approved home energy simulation software. (REMRate) Afternoon Session Provides Examples 7

9 EEM and HERS Rater New Construction: Plan rating produces yearly energy savings over and above 2000 or 2004 IECC. This is used to calculate present value and to determine allowable EEM amount. Implementation inspections and test out are mandatory. Final report sent to builder, lender, owner. EEM Underwriting Borrowers of New Construction EEMs can get stretch ratios of 33% to 45%. A debt-to-income ratio "stretch" means that a larger percentage of the borrower's monthly income can be applied to the monthly mortgage payment. 8

10 EEM Underwriting New Construction When qualifying a borrower, cost of energy package is deducted from the sales price, this lower amount is then used to qualify the borrower. * This helps out with appraisal comps, reduces down payment for buyer, and helps builder increase margins on the sale.* EEM Underwriting Mortgage is initially underwritten as if Energy Package did not exist, using standard FHA underwriting, qualifying income ratios, & max. mortgage / min. cash investment requirements without regard to energy package. 9

11 EEM Underwriting Once borrower and property qualify for a mortgage to be insured by FHA, the mortgage lender, using the HERS Rating Report and the EEM worksheet will determine the allowable $ amount of the cost effective energy package that can be added to the loan amount. Energy Improvement $Limits * class exercise The maximum amount of the portion of the EEM for energy improvements is the lesser of 5% of: - the value of the property, or - 115% of the median area price of a single family dwelling, or - 150% of the conforming Freddie Mac limit. 10

12 EEM Loan Limit Examples: Wayne County: Appraises for $240,000 (Median Sale Price $164,000) (Freddie Mac Limit $417,000) Max amount is lesser of.05 x $240,000 = $12,000 (1.15 x $164,000) x.05 = $9,430 (1.50 x $417,000) x.05 = $31,275 EEM Loan Limit Examples: Pike County: Appraises for $417,000 (Median Sale Price $622,000) (Freddie Mac Limit $417,000) Max amount is lesser of.05 x $417,000 = $20,850 (1.15 x $622,000) x.05 = $35,765 (1.50 x $417,000) x.05 = $31,275 11

13 EEM Loan Limit Examples: Lackawanna County: Appraises for $100,000 (Median Sale Price $122,000) (Freddie Mac Limit $417,000) Max amount is lesser of.05 x $100,000 = $5,000 (1.15 x $122,000) x.05 = $7,015 (1.50 x $417,000) x.05 = $31,275 Energy Improvement $Limits * Regardless of the property s value, every borrower who otherwise qualifies can finance at least $4,000 of the cost of the Energy Package, if that cost meets or exceeds $4,000. The FHA max loan limit for the area may be exceeded by the cost of the Energy Efficiency Improvements. 12

14 Weatherization Funds Up to $2,000 can be added to both the sales price for (purchases) and appraised value, without value determination separately or as an overlay with an EEM. Existing home purchases only. HUD Weatherization Reference: A.5.d-g HUD Links for EEM Data ters/mortgagee/2009ml.cfm - Mortgagee Letter

15 EEM s FHA New Construction FHA Loans - New Construction - 15 or 30 year Fixed or ARM - Cost of Energy Package subtracted from the sales price. The lower sales price is used to calculate the base loan amount IECC is minimum standard to be used as baseline. - Cost Effective Energy Improvements over & above 2000 or 2004 IECC baseline can be included. FHA EEM Refi s EEMs are compatible with Refinancing. For a streamline refinance, the borrower s principal and interest (P&I) payment on the new loan including the energy package may be greater than the principal and interest (P&I) payment on the current loan, provided the estimated monthly energy savings as shown on the HERS report exceeds the increase in the P&I. 14

16 FHA EEM Refi s The appraisal does not need to reflect the value of the energy package that will be added to the property for either new or existing construction. On a streamline refinance made without an appraisal, the original principal balance substitutes for an appraised value. On a Section 203(k), the after-improved value is to be used for the EEM process. FHA EEM Weatherization Funds can act to provide additional funding to cover cost of energy improvements beyond maximum allowable EEM Loan. Standard limit is $2,000. Weatherization dollars do get added to the appraised value. Weatherization dollars cannot be used with streamline Refi s, as it is considered a cash out in this case. 15

17 FHA EEM Endorsement FHA EEM insurable immediately after closing. Energy Improvements do not need to be completed before FHA insures the mortgage with existing properties. With new construction, the energy package must be complete at time of closing. FHA EEM Escrow For existing properties, the lender at closing is to establish an escrow account for the energy improvements. Any funds remaining in the escrow account at the end of the construction period must be applied to pay down the loan principal. 16

18 FHA EEM Escrow If the energy package is part of a Section 203(k) rehabilitation loan, then the escrowed amounts of the energy package must be included in the Rehabilitation Escrow Account. In all cases, the lender is to execute form HUD 92300, Mortgagee Assurance of Completion, to indicate that the escrow for the energy efficient improvements has been established. FHA EEM Escrow The energy improvement contractor(s) will be paid directly from the underwriter via the escrow account upon approval of the work by the HERS Rater and Lender/Underwriter. The HERS Rater Fee can also be escrowed if it fits into the maximum loan amount, otherwise borrower pays directly. 17

19 EEM and HERS Rater Once borrower is qualified by underwriter for a specific property and the standard loan application is complete. The realtor, borrower and or lender must make arrangements for the HERS Rater to complete the test-in and analysis. The existing homeowner will have to be agreeable upon this as a condition of sale. EEM and HERS Rater HERS Rater will need complete access to the home and all mechanical equipment for a period of 2 to 5 hours in most cases. And require several days to complete the analysis and report for the underwriter. 18

20 Installation of Improvements For existing construction the energy package must be implemented within 90 days of the loan closing. If not funds get applied to mortgage principal. Borrower cannot be paid for sweat equity. Installation of Improvements HERS Rater cannot be party to any of the installed improvement measures. Borrower can use any contractor or various subcontractors. HERS Rater can assist borrower with choosing specific trades and keeping costs inline to maximize the benefit. 19

21 Installation of Improvements Energy package must be installed as specified by the HERS Rater and as approved by Lender/Underwriter. If final work differs from the approved energy package, funding for those portions of work will be applied to the principal loan amount. Installation of Improvements It is critical for the HERS Rater to provide very clear instructions for the Energy Package to the underwriter, borrower, trades, & contractor(s). It is also critical that these instructions be in the contract between borrower and contractor(s). HERS Rater must inspect and test-out. 20

22 Installation of Improvements The lender is responsible for notifying FHA through the FHA Connection or equivalent that the improvements have been made and that the escrow has been cleared. Installation of Improvements Fees FHA does not set fees with regards to the work being done by the HERS Rater. Rater fees can be financed & escrowed as part of the Energy Package if within the max. allowable limits. If not, such fees are considered allowable closing costs. Estimated Rater Fees $1,000 to $1,

23 Borrower Benefits of EEM s Improved Home with little to no extra out of pocket expenses. Increased monthly free cash flow Improvements pay for themselves Lower down payment Increased loan value Borrower use EEM to subsidize broader energy improvements and pay difference. Borrower Benefits of EEM s $180,000 Loan 30 yr fixed at 5% = $1, monthly payment. $8,000 added to loan per EEM produces an average monthly savings of $80 per month. New loan is $188,000 with a monthly payment of $1,

24 Borrower Benefits of EEM s A $42.95 increased monthly cost for an $80.00 per month savings. Net free cash flow of $37.50 per month or $450 per year. Lender Benefits of EEM s More secure paper. More loans if you promote it and educate your existing and potential client base. 23

25 Builder Benefits of EEM s Nobody else is promoting this in the area and I mean nobody!!! If you are already building energy efficient homes, you can immediately get better comps and increase value and margins. You can save your clients some down payment dollars and increase your future sales and comps. 24