Green Loans

What are Green Loans?

Also known as energy efficient mortgages, green loans are designed to help consumers purchase a home that’s easy on their pockets and the environment.

However, you can’t just pick a random home and finance it through this program. In fact, according to EnergyStar.gov, you’re required to have the home assessed by an energy rater to determine if it’s truly energy-efficient. If it passes the test and is rated as such, you can move on to the next step in the financing process and close on the home if all else checks out.

Another option is to find a home that you can make more energy efficient through renovations or improvements. If you go this route, you’ll still need to have it assessed to gauge the Energy Savings Value.

Otherwise, you’ll need to find another home or choose a different loan product. But should you decide to move forward with applying for a green loan, there are three options to choose from:

Conventional Energy-Efficient or Improvement Mortgage

Conventional Energy-Efficient Mortgages work in the same way as traditional conventional mortgages. However, the key difference is the benefits offered to borrowers to purchase an energy-efficient home or upgrade a home with energy-saving improvements, according to HUD.gov.

FHA Energy-Efficient Mortgage

FHA Energy-Efficient Mortgages are designed to help you cover the cost of improvements that will make your home more energy-efficient. It is available for new mortgages or existing mortgages that you wish to refinance. You should also know that these mortgages are available in 50 states.

The idea is the more energy-efficient the home, the lower the cost of monthly utility bills. In turn, you will have more funds at your disposal to cover the mortgage payments, notes EnergyStar.gov.

Although standard FHA loans must not exceed the loan limits defined for your area, an exception applies to this type of mortgage. The loan amount is allowed to exceed the FHA mortgage limit by the anticipated price of the energy-efficient improvements.

And if you’re approved, you have 90 days to have renovations completed. You should also know that the funds designated for energy-efficient improvements are held in an escrow account and won’t be available to you until the home passes another inspection that verifies they will be effective and accomplish the cost-savings goals.

In most instances, you can expect the following terms with an FHA Energy-Efficient Mortgage:

VA Energy-Efficient Mortgage

These loans are offered through the Department of Veterans Affairs and can be used to purchase or refinance an existing home and make energy-efficient improvements, according to benefits.va.gov.

VA Energy-Efficient Mortgages will allow you to take out that is equal to the cost of the home, plus expenses associated with making improvements. This amount usually ranges between $3,000 and $6,000. However, a higher amount may be approved if a valuation supporting the increase is provided.

You should also know that only the cost of materials needed to make the improvements will be considered if the work will be done by the veteran taking out the loan, and not a licensed contractor.

What Qualifies as an Energy-Efficient Improvement?

Wondering what features in the home you’re considering qualify as energy-efficiency improvements? Below is a list of improvements that lenders and raters will consider:

Quick note: this list is not comprehensive, so you should confirm with the lender if there’s something you don’t see on the list but believe qualifies for inclusion.

Should You Apply for a Green Loan?

If you want to increase the value of your home while lowering the cost of your monthly utility bills and living more comfortably, green loans are definitely worth considering. And whether you’re in the market for a new home or looking to remodel your existing property to make it more energy-efficient, there are green loan products that can fit your needs.

Even better, you may be eligible for a green loan with less stringent qualification criteria, like the FHA or VA Energy-Efficient Mortgage. In fact, if you have a credit score of at least 600, relatively low debt to income ratio, and substantial income to prove you can afford to make timely payments, you may qualify. (Quick note: a credit score as low as 500 may be accepted for FHA loans, but expect to make a down payment of 10 percent).

How to Prepare Your Finances for a Green Loan

Step 1: Check Your Credit

Lenders rely heavily on creditworthiness to make a decision on whether or not to approve you for a mortgage. And it’s for good reason; most mortgages are hundreds of thousands of dollars, and banks can’t afford to extend loans to consumers that are very likely to default. While mortgages are secured by the property and the lender can foreclose to help recoup their losses if you bail out on the loan, it’s a costly and time-consuming process.

But you don’t have to have perfect credit to get approved for a green loan. In fact, consumers with fair credit have relatively good approval odds as long as they’ve turned a new leaf and appear to be managing credit more responsibly. Lenders generally ignore any missteps that are over two years old, but require that any accounts be settled or paid-in-full before approving your application.

For these reasons, it’s important to check your credit before applying. That way, you’ll know what’s on your report and where your score stands. It’s possible that you’re in the clear and can go ahead and start shopping for lenders. But there’s also a chance that you need to do a little work to reduce your chances of being rejected or charged an exorbitant interest rate and PMI premium. (And it may also be worth a shot to work on improving your credit, even if you already qualify for a green loan, to receive the lowest interest rate possible).

You can get a free copy of your credit report from each of the three credit bureaus, Equifax, Experian, and TransUnion, by visiting AnnualCreditReport.com. (If you want to view your official FICO score, you’ll have to pay a small fee). Review all three reports from start to finish and highlight any inaccurate and untimely information that should have aged off by now. Also, circle any negative items.

The next step is to file formal disputes with the credit bureaus to have errors or dated information (over seven years old in most cases) removed. You’ll see your score improve once they are taken care of.

But for negative items, you’ll have to work directly with the creditor or collection agency to have them resolved. For accounts that are now in good standing, contact the creditors in writing and ask that they remove the late payments as a goodwill adjustment. And request for deletion arrangements with debt collectors to clear up collection accounts.

No luck? Don’t fret. As time progresses and more positive activity is reflected in your credit report, your score will start to improve. And if you want to expedite the process, consider a secured credit card or credit builder loan. Also, work hard to bring those debt balances down and be sure to stay current on all your debt obligations.

Step 2: Shop Around

There are scores of lenders who offer green loans, so it’s easy to get overwhelmed when trying to compare lenders and narrow down your options. But there are a few ways to make the evaluation process much easier on you:

Step 3: Narrow Down Your Options

Of course, you want to ax any lenders off your list that don’t offer green loans. You also want to keep the following in mind when evaluating lenders:

Step 4: Get Preapproved

You’re almost to the finish line, well at least until you can start shopping for a home or making energy-efficient improvements to your existing property. Now, it’s time to get preapproved so you can go shopping. Not only will the lender ask that you complete an application, which is usually found online, but you’ll need to provide them with the following documentation:

They will process your loan application and provide a decision within a few days, although you could hear from them sooner. Lenders provide that time window because unlike a prequalification which usually just says yes or no based on a few questions you answer, the preapproval will provide you with a detailed loan offer that includes a breakdown of payments, interest, fees, and any closing costs you should expect.

The Bottom Line

Green loans give consumers the best of both worlds. They are a great way to play your part in preserving your environment, and you can do so while living in the home of your dreams. That’s a win-win situation, and best of all, you may be able to qualify because they have less stringent qualification criteria.