Understanding Energy Efficient Mortgages with Gene Gustafson

What does EEM even mean? Not EEM, but E.E.M. The U.S. government embraces extensive usage of acronyms. Journalists, not so much. We love to spell things out. To explain how things work, the meanings of words and phrases, and to simply com-mun-i-cate well.

So, Iʼm going to describe what an E.E.M., or Energy Efficient Mortgage, means to the potential homebuyer or current homeowner.

According to Gene Gustafson, branch manager of imortgage of Fort Collins, “the process of qualifying for, and then obtaining, an E.E.M. loan is not that difficult. These are mortgage programs offering special consideration for energy efficient homes. The whole spirit is to encourage homeowners to purchase a new home with these features, or to install them in an older home.”

Now, in an effort to clarify, I will attempt to elucidate in a way that is as clear as the Big Thompson River after the 2013 flood. Well, hopefully a bit better than that.

So in order to keep from muddying the waters as much as possible, Iʼll avoid using abbreviated, words or terms. To that end, from here on out, E.E.M.ʼs will be referred to by the interchangeable term of Green Mortgage.

What is a Green Mortgage?

“Basically, the way they work is that the homebuyer, or homeowner looking for a refinance, will get an energy audit. The report lists possible improvements needed, such as new windows or insulation. Then the loan is based on the value of the house, plus the new added value of the improvements,” says Gustafson.

In other words, according to the HUD (aack - another acronym: U.S. Department of Housing and Urban Development) website, a Green Mortgage credits a homeʼs energy efficiency within the mortgage itself. Borrowers are given an opportunity to finance cost-effective measures as part of a single payment. This serves to stretch debt-to-income qualifying ratios on mortgage loans, which allows for a larger loan amount as well as a better, more energy-efficient home.


“There are two main requirements,” says Gustafson. “These include a HERS report (which weʼve discussed in a previous blog - standing for Home Energy Rating System) and a bid from a contractor. Anything that is shown to be cost effective, such as windows, insulation, ductwork or HVAC (stop already - youʼre killing me: Heating, Ventilation and Air Conditioning. Fairly straightforward, that one).”

Once these are accepted by the lender as improvements that will provide significant energy savings, then the loan can be approved for the extra amount indicated by the contractor.

“Unfortunately, looking at a pure economic standard, solar doesnʼt usually work for existing homes,” adds Gustafson. The reason being is that itʼs simply too expensive to purchase, retrofit, and install for the energy savings gained.

“Basically any home that is purchased through regular mortgages, including FHA, VA, (Really?! Initials again.) Conventional, Freddie Mac or Fannie Mae, have to go through the audit and then contractor reports. There are some differences, but they all have the same functionality,” says Gustafson.

Everyone who qualifies for one of the above loans also qualifies for a Green Mortgage.

How they work

A Green Mortgage can work for the average new homebuyer because it “allows you to have a more comfortable home, plus energy saving features,” says Gustafson. He also advises that the improvements “might change the comfort level, but they wonʼt change much financially. Recognize there will be some cost savings, but mainly we want to encourage people to get energy efficient homes.”

Significant upgrades can be incorporated into one of the most important purchases youʼll ever make, your home, thereby reducing the overall carbon footprint. This is better for you, your family, and the environment.

A basic example of how this works looks something like this:

If a home is priced at $200,000, with a mortgage amount of $192,000 (96% of price), the monthly payment on a 30-year, 5.5% loan would come to $1,090. Assuming current gas and electric bills are $186 per month, total monthly cost would be $1,276.

Now, the same home approved for $10,000 of energy improvements would show slightly different numbers. The home price increases to $210,000, with a mortgage of $201,600. The monthly payment would then come in at $1,145, only slightly higher than the first scenario. Energy bills, however, would decrease to $110 and the overall monthly cost of homeownership would be $1,255, for a total monthly savings of $21.

Of course, these values shown are for comparison purposes only and will vary from home-to-home.


Now available in all 50 states, a typical FHA Green Mortgage covers upgrades for both new and existing homes. The HUD report states some key features of the program are that original loan limits may be exceeded, there is no re-qualifying, no additional down payment and improvements are made after closing since the appraised value is based on the home prior to upgrades.

Qualification is confirmed! Now what?

“Once the process has passed the HERS and contractor bid stages, the loan is submitted to an underwriter,” says Gustafson. “When the work and inspection are done, funds are then dispersed through an escrow fund.”

Gustafson cautions that a loan of this nature can take longer than the traditional loan process does. “You will need to add extra time for an approval, which makes it tough in a competitive situation such as the current market.”

Tax incentives

According to the HUD website, consumers may receive a larger tax deduction than usual with a Green Mortgage because the interest on mortgage payments is tax deductible.

Who benefits?

Buyers - Qualify for a larger loan and possibly a better home; more immediate comfort; save money monthly, increase the potential resale value of the home.

Sellers - Sell the home more quickly; make house affordable (therefore, more attractive) to more people; attract attention in a competitive market.

Remodelers & refinancers - Receive green energy benefits without moving, make improvements that will save money both now and later; potentially increase the resale value of the home.

Environment - Save water and energy; lower your carbon footprint; taking another step towards a sustainable way of living.

For more information about Gene Gustafson and the Energy Efficient Mortgages offered at imortgage of Fort Collins, please visit www.imortgage.com/gene.gustafson

Author - Lynette Chilcoat

Loveland-based Lynette Chilcoat, a Colorado native, has been a freelance writer for nearly 20 years.

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