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As part of the White House’s National Clean Energy Summit, the Obama Administration and the Federal Housing Administration (FHA) have jointly announced its intent to issue a set of guidelines supporting borrowers seeking to make energy efficient improvements to their homes. In today’s announcement, FHA expressed the intent to allow borrowers to use Single-Family FHA financing for properties with existing Property Assessed Clean Energy (PACE) loans that meet certain conditions.
“These new tools will help homeowners make smart choices for their pocketbooks and for the environment,” said HUD Secretary Julián Castro. “HUD and the Obama Administration are proud to invest in American families and in the future of our planet.”
In 2009 and 2010, many states adopted legislation allowing local governments to implement PACE programs using their (tax) assessment authority. PACE can vary from state-to-state, but generally allows homeowners to finance energy efficiency improvements for up to 20 years through assessments attached to the property. PACE allows homeowners to benefit from the improvements immediately and spread the cost over time. When the property is sold, the PACE loan remains with the property and the next owner is responsible for repaying the loan.
The Single-Family FHA guidance will allow lenders to evaluate the conditions under which borrowers purchasing, refinancing properties, or modifying their loans with existing PACE assessments will be eligible to use FHA-insured financing. Through this guidance FHA is committing to develop more specific guidance in the near future that will include the following requirements:
►PACE liens that preserve payment priority for first lien mortgages through subordination are eligible;
►PACE assessments must be fixed-rate and fixed repayment schedule;
►PACE assessments must be recorded and identifiable to the lender; and
►PACE assessments must be attached to single family properties, as defined by FHA, which are one- to four-unit dwellings.
Additionally, to support efforts to provide potential homeowners with an easy way to measure the energy efficiency of their homes and to benefit from the associated cost savings, FHA also announced a new partnership with the Department of Energy (DOE) that will incorporate the use of DOE’s Home Energy Score into Single Family existing FHA’s Energy Efficient Home (EEH) program. Under the new FHA and DOE partnership, FHA will provide flexible underwriting to recognize the reduced costs of utilities when those costs are established with the Department of Energy’s (DOE) Home Energy Score.
Homebuyers or homeowners who want to obtain an FHA-insured purchase or refinance mortgage for a single family home that receives a Home Energy Score of six or higher will be eligible to increase their income qualifying ratio by 2% above the standard Single Family FHA limit.
DOE developed the Home Energy Score as a low-cost, reliable method to estimate a home’s energy use. It is the equivalent of a vehicle miles-per-gallon rating for homes. The calculation methodology relies on a 10-point scale in which a “1” corresponds to the least energy efficient homes and a “10” corresponds to the most energy efficient homes. According to DOE, the average U.S. home will score a “5.” The official DOE-recognized Home Energy Score can only be assessed by a qualified energy assessor.