A bipartisan energy bill that was introduced to the Senate late last month would benefit mortgage borrowers who buy or refinance energy-efficient homes.
The SAVE Act, co-authored by U.S. Senators Michael Bennet (D-CO) and Senator Johnny Isakson (R-GA), would allow federal mortgage agencies to consider a property’s energy efficiency and expected energy bills when determining a homeowner’s ability to repay their mortgage.
Energy Reports Become Part of the Mortgage Underwriting Process
When applying for a federally backed loan, such as an FHA loan, VA loan, or Fannie Mae/Freddie Mac loan, the borrower would have the voluntary option to submit a so-called energy report.
From this report, lenders would determine the energy savings associated with any green fixtures, such as energy-efficient appliances, windows and insulation, or solar panels, and compare them to average energy costs for similar homes in the area.
Those savings could then be used to offset other monthly liabilities when determining the borrower’s debt-to-income ratio, thereby giving the consumer more purchasing power.
It could also mean the difference between an approval and a denial if the borrower’s DTI was right on the cusp, particularly important with the new Qualified Mortgage rules.
Additionally, lenders would be able to factor in the present value of energy savings into the value of the home when calculating the loan-to-value ratio.
So if a home came equipped with solar panels or some other energy-savings upgrades, they could actually lower the LTV, and potentially push a loan below key thresholds.
For example, a lender could add energy upgrades to a home’s value to push the LTV down to 80% or lower to help a borrower avoid private mortgage insurance.
Lenders would also be required to inform loan applicants about the benefits of energy efficiencies and the resources available to them.
Additionally, the legislation would allow homeowners to finance energy upgrades into their mortgages.
Homeowners Spend $70,000 on Energy Costs During 30-Year Mortgage Term
The lawmakers claim the average homeowner spends $2,500 in energy costs annually, or a whopping $70,000 during a 30-year mortgage term.
Energy efficiency upgrades can lower these costs by 30% or more, putting cash in the pockets of homeowners that could even go toward paying down the mortgage earlier.
Last year, a study conducted by the University of North Carolina at Chapel Hill (UNC) Center for Community Capital and the Institute for Market Transformation (IMT) found that owners of energy-efficient homes were about a third less likely to miss their mortgage payments.
The author of the study argued that green homeowners could be entitled to lower mortgage rates, further increasing their purchasing power.
If passed, the SAVE Act could result in energy savings of $1.1 billion, which in turn would be funneled back into the economy.
Investment in energy-efficient home building also has the potential to create an estimated 83,000 construction jobs.