ENERGY STAR Mortgages: Frequently Asked Questions for Lenders

Prospective homebuyers meeting with a lenderWhat is the goal of the program?

The program is intended to demonstrate that financing can be a successful tool for lenders and borrowers to promote whole-house energy-efficiency improvements, and that utilizing qualified contractors and energy auditors is key to achieving real-world energy savings.

What kind of mortgages can be ENERGY STAR?

The ENERGY STAR Mortgage label can attach to any of your single family, first- or second-mortgage products for owners of existing single-family (1–4 family), owner-occupied homes who undergo a Home Performance with ENERGY STAR assessment and improvement process that yields a minimum 20% energy savings. The borrowers can also be owners of homes that can achieve a 20% energy savings through improvements made under a Weatherization Assistance Program. The mortgage amount is capped at the Fannie/Freddie maximum. The borrower can be a homeowner who wants to improve her existing home's energy efficiency, or a home purchaser who wants to incorporate energy improvements into the transaction. In addition, you can offer an ENERGY STAR mortgage to any purchaser of a new ENERGY STAR-rated home, without any additional rehab work necessary.

The mortgage can be a stand-alone mortgage containing the improvements, or a mortgage closed simultaneously with a subordinate energy-efficiency loan funded via public monies, utilities or other sources. The first or second mortgage can possess any kind of legally permissible, non-predatory structure, including a fully amortizing fixed-rate mortgage of various terms, a reverse mortgage, or an interest only/amortizing hybrid with a fixed term and adjustable-rate mortgage, as long as the borrower qualifies for the loan at the time of application to its highest adjusted rate and shortest structured term. The mortgage can incorporate available state and other discount programs.

How can lenders participate in the ENERGY STAR mortgage program?

The program is already underway in Maine Exit ENERGY STAR and Colorado Exit ENERGY STAR. Work is underway to expand to other states including Massachusetts, New York, New Jersey, Pennsylvania, and the District of Columbia. To participate in the program, lenders must be operating in at least one of the participating states and:

  • meet our energy savings requirements as well as our customer net-benefit and financial institution requirements,
  • sign our lending agreement and become an ENERGY STAR lender partner,
  • be a regulated lender or state-supported loan program, and
  • undergo a review, approval, and oversight process administered by Energy Programs Consortium, who is acting as a third-party lender oversight organization for the program.

Lenders should contact their state representatives, state energy offices, and state housing finance agencies and urge them to support the ENERGY STAR Mortgage.

What is the "net benefit" that banks are required to offer?

In exchange for a license to extend our valuable ENERGY STAR brand, participating lenders must provide their customers with a "net benefit" cost advantage, such as an interest-rate discount, reduced loan fees, closing-cost assistance or another benefit that reduces the cost of the mortgage compared with the financing package that would otherwise be available to that borrower. The benefit must be approved by Energy Programs Consortium, as part of an audit review, and pursuant to agreements with the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE).

Describe the lender approval, oversight and review process.

Lenders will sign a legally binding agreement to comply with program requirements, and, in exchange, will receive a brand license to use the ENERGY STAR label and logo on products and marketing. On an ongoing basis, EPC will monitor and report to the federal sponsors the lending activity and compliance of the approved lenders. Lenders must annually demonstrate:

  • Capitalization sufficiency and approved secondary-market affiliations.
  • Capacity, as determined by an EPC review of lender facilities, teams and systems.
  • Documented consumer "benefit," including documentation that any benefit is not offset by an increase in other loan costs.
  • A RESPA-compliant loan activity review of a statistically significant number of all the ENERGY STAR Mortgages made.

Explain the mechanics of an ENERGY STAR Mortgage.

An ENERGY STAR Mortgage incorporates the cost of energy-efficiency investments into the total lending package. If the energy work is included in the loan, often through a refinancing, a typical, 30-year term of a mortgage effectively reduces the monthly payments for these improvements (as compared with a straight rehab loan) and can permit the borrower to deduct the full mortgage interest from their federal and state income taxes, further reducing improvement costs.

The energy work can be included in the mortgage, but does not have to be. We know that lenders know best what types of products will meet their customers' needs for savings. So we allow the energy work to be accomplished using unsecured loans, state subsidies, public benefit funds or utility-supported energy loans, a second mortgage or grants. Through this flexibility, we allow lenders to use the valuable ENERGY STAR brand in a package the best meets consumers' needs for savings.

Who is involved in the program?

The ENERGY STAR Mortgage program is a collaborative effort between the U.S. Environmental Protection Agency, the U.S. Department of Energy, the Energy Programs Consortium (EPC), state energy and housing agencies, as well as the Ford Foundation and the Surdna Foundation. EPC is acting as the administrator and third-party lender oversight organization for the program in partnership with the organizations listed above. EPC is a 501(c)(3) nonprofit organization that conducts policy research and launches and manages transformative demonstration programs affiliated with state energy agencies including: National Association of State Energy Officials, National Energy Assistance Directors' Association, National Association of Regulatory Utility Commissioners and National Association for State Community Services Programs.

ENERGY STAR itself is a federal government program that is run jointly by EPA and DOE. The ENERGY STAR brand is owned by the federal government. DOE and EPA have allowed EPC to use the brand for the purposes of promoting energy-efficient financing in the residential sector that meets the pilot program's requirements.

I already offer rehab loans. Why should I participate in the ENERGY STAR Mortgage Pilot Program?

The ENERGY STAR brand is already recognized by 70% of all Americans. That's 77 MILLION American households. In addition, our trusted brand is synonymous with "savings" — an important message today for families seeking to reduce expenses and preserve savings and home investments.

Why are you partnering with private banks to offer ENERGY STAR Mortgages?

Our goal is to help homeowners reduce homeownership costs through energy-efficiency improvements. We know that, to catalyze this market, homeowners and homebuyers need access to competitive financial products — mortgage products offered by private banks like yours. We also hope to help stabilize your loan portfolios – which can occur through energy and mortgage cost reductions made available to your eligible customers.

Can all my customers participate in the program?

Any person who is an owner or purchaser of a single-family home — defined as a one-to-four-family, owner-occupied home — may use an ENERGY STAR Mortgage offered by your bank. The program is available to borrowers at all income levels, including lower-income families, for whom we may bundle available public subsidies to achieve even greater cost savings.

I have heard that energy audits are expensive and take a long time. What have you done differently for this program?

Because our mortgage product is based on the achievement of a 20% energy savings, ENERGY STAR borrowers must be able to document those savings. Therefore, the home must obtain an energy audit. However, unlike other government programs, we do not mandate a single type of audit nationwide. Rather, we allow borrowers to use whatever kind of audit is approved and used by the Home Performance with ENERGY STAR program or Weatherization Assistance Program available in that borrower's state. And, by increasing the number and types of audit tools, we have reduced the average audit cost. Some lenders are covering the cost of the audit as part of their benefit. And, some states are offering reduced-cost audits to ENERGY STAR borrowers. We are also permitting the audit cost to be included in the mortgage.

Is an ENERGY STAR mortgage the same as an Energy Efficient Mortgage (EEM) or an Energy Improvement Mortgage (EIM)?

While an ENERGY STAR mortgage, an EEM and an EIM all take into account the savings associated with reduced home energy use, the ENERGY STAR Mortgage program has requirements that are different than those of the EEM and EIM programs offered through Fannie Mae, Freddie Mac, FHA, and VA, although borrowers could apply for a mortgage that qualifies as an ENERGY STAR mortgage and an EEM or EIM. For example, a borrower could receive the financial benefit provided by a participating lender for an ENERGY STAR mortgage and also qualify for an EEM, thus taking advantage of the EEM's benefit of permitting the use of higher expense to income and debt to income ratios.

Can borrowers combine other incentives, grants, or rebates to help lower the cost of an ENERGY STAR mortgage?

Yes, borrowers can use other incentives, grants, or rebates Exit ENERGY STAR being offered at the federal, state, or local levels to help lower their borrowing costs for an ENERGY STAR Mortgage.

Who can I contact for more information?

For information contact Brian Ng at Ng.Brian@epa.gov

Energy efficient homes that earn the ENERGY STAR are good for lenders, builders, homeowners and the environment. As a lender, you have the opportunity to see immediate benefits by writing more loans for more money, with less risk. You can also team with local builders and utilities to become leaders in the community and promote better products and a cleaner environment. Become an ENERGY STAR Lender, and realize the advantages of selling energy efficiency.