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September 2015

Borrowers making energy efficient upgrades may qualify for new incentives from FHA

Borrowers who want to make energy efficient upgrades to their homes may be able to use Single Family FHA financing for properties with existing Property Assessed Clean Energy (PACE) loans. The allowance was part of new guidelines the FHA announced in late August.

In the same announcement, FHA unveiled a new partnership with the Department of Energy (DOE) to help borrowers using Single Family FHA's Energy Efficient Home (EEH) program take advantage of energy cost savings when measured by DOE's Home Energy Score.

PACE programs allow participants to finance energy efficiency and renewable energy projects through property assessments that last the functional life of a project, typically five to 20 years. One of the benefits of the PACE model, according to the National Conference of State Legislatures (NCSL), is that it is built from a municipal financing model. Such models have been used for decades for items that serve the public good, such as street paving, parks, water and sewer systems, or municipal street lighting.

PACE programs can help increase both the accessibility and the affordability of energy saving measures, resulting in lower energy bills to residents and reduced environmental footprints of participating localities. Another benefit is preservation of the marketability of properties with PACE loans.

According to the U.S. Energy Information Administration, 40 percent of total U.S. energy consumption is consumed in residential and commercial buildings. Some property owners have been reluctant to invest in energy efficient or renewable energy systems, citing high up-front costs and statistics indicating residents move every six to nine years on average.

The new guidelines would ease such barriers. Now, when a property is sold, the unpaid balance of the PACE loan stays with the more energy efficient property, with the new owner responsible for repaying the loan (usually through property taxes).

These new tools will help homeowners make smart choices for their pocketbooks and for the environment, said HUD Secretary Julián Castro. "PACE allows homeowners to benefit from the improvements immediately and spread the cost over time."

A statement from the White House coinciding with the FHA announcement of the guidelines said executive actions and private sector commitments "will continue to promote the use and development of smart, simple, low-cost technologies to help households save on their energy bills and help America transition to cleaner, and more distributed energy resources." The statement also noted PACE programs could potentially unlock alternative sources of capital to accelerate renewable energy and efficiency retrofits for households, and reduce energy costs for consumers.

FHA also announced an initiative that allows consumers to qualify for a higher loan amount due to cost savings associated with energy efficient improvements. With that program, offered in partnership with DOE, the FHA will provide flexible underwriting to recognize the reduced costs of utilities when those costs are established with DOE's Home Energy Score in areas where such performance scores are available.

DOE's new Home Energy Score is a low cost, reliable method for estimating the energy use of a home. Officials say the score is similar to the easily-understood "miles per gallon" label. It measures the energy efficiency of homes on a scale of 1-10.

NCSL said PACE has stimulated energy saving investments and rapid acceptance across the U.S.  Establishing a PACE program typically requires enabling authorization by each state's legislature. NCSL data show legislation is authorized in 31 states and Washington, D.C., with 12 states and the District of Columbia having active PACE programs. Washington state is not among them.

The announcement of the new guidelines and partnership coincided with the White House National Clean Energy Summit in Las Vegas. At this year's 8th annual event, President Obama told the audience "we're here today because we believe that no challenge poses a greater threat to our future than climate change." Attendees included policymakers, business executives, energy policy experts, entrepreneurs, investors, citizens, and students.