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HUD/FHA announced a new partnership between FHA and the Department of Energy (DOE) which incorporates the use of DOE’s innovative Home Energy Score into FHA’s current Energy Efficient Homes (EEH) program, in Mortgagee Letter 2015-22, dated September 30, 2015.
If you currently work for a mortgage lender that originates FHA insured loans, you may ask what the significance is relative to this new partnership as HUD has had an EEH program in effect since 1995?
Under the current EEH program guidelines, the Borrower was required to obtain a home energy assessment conducted by a qualified energy rater using whole-home assessment standards and procedures. This assessment report would determine whether or not any proposed energy efficient improvements being made to an existing dwelling were deemed cost effective (and would then be eligible for inclusion in the mortgage) – meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement. The problem experienced by many prospective Borrowers was the cost and timeliness of obtaining this home energy assessment report.
DOE’s Home Energy Score will reportedly offer a low cost and reliable method for estimating a home’s energy use and will generate a “score” to rate the relative energy efficiency of a home.
This “score” will be based on a 10 point scale with “1” applying to homes likely to use a large amount of energy and “10” corresponding the most energy efficient homes. Most importantly, homes that currently score a “6” or higher or homes that proposed energy improvements would increase a home’s score to a “6” or higher would enable the underwriter to “stretch” the borrower’s qualifying debt ratios from 31% (front end) and 43% (back-end) to 33% and 45% respectively. It should be noted that this new option is available for FHA loans that have obtained their case number assignment on or after January 25, 2016.
Loading ...In my opinion, I do not believe that many prospective FHA borrowers will take advantage of these new standards for EEH mortgages – at least in the first year.
Time delays associated with obtaining the Home Energy Assessment Score, availability of obtaining a score, the scores themselves and the small “stretch” (only 2%) in DTI ratios will all be negative factors influencing loan originations.
Looking on the positive side, if the Home Energy Assessment Score report can be obtained quickly and for a reasonable charge, I can envision some creative Loan Officers and Realtors promoting the benefits of purchasing a more energy-efficient dwelling (assuming the property has a minimum score of “6” either before or subsequent to making improvements) to prospective buyers. The end result would be that such Borrowers would need less income to qualify for the mortgage amount being requested. This would be a win-win situation for all involved.
If you are interested in locating a qualified Home Energy Score Assessor – a searchable database is available at: www.homeenergyscore.gov.
The game has changed – we all need to play different!
