Selling Guide

Published August 29, 2017

B5-3.3-01: HomeStyle Energy for Energy Improvements on Existing Properties (05/31/2016)

This topic contains the following information concerning mortgage loans on existing properties where energy improvements are included as part of the transaction, including:

Overview

There are a number of HomeStyle Energy financing options available to a borrower who wishes to improve the energy efficiency of an existing property and decrease its related utility costs. These options include

  • paying off a PACE loan or other debt incurred for energy-related improvements in a limited cash-out refinance (described in B2-1.2-02, Limited Cash-Out Refinance Transactions), or

  • financing energy-related renovations up to 15% of the “as completed” value of the property in a purchase or limited cash-out refinance transaction.

There is no minimum dollar amount for the energy improvements; the maximum dollar amount depends on the type of HomeStyle Energy activity and the transaction, described in the table below.

Note: HomeStyle Renovation approved lenders may use HomeStyle Energy financing in conjunction with HomeStyle Renovation to finance energy-related and other renovations totaling up to 50% of the “as completed” value of the property. See Section B5–3.2, HomeStyle Renovation Mortgage, for the requirements.

HomeStyle Energy Activity Maximum Amount to Finance Energy-Related Items
Payoff of existing PACE loan For limited cash-out refinances of:
  • a PACE loan originated prior to July 6, 2010, the entire limited cash-out refinance loan amount may be used to pay off the PACE loan. See B5-3.4-01, Property Assessed Clean Energy Loans.

  • a PACE loan originated on or after July 6, 2010, or other debt used for energy improvements, limited to 15% of the appraised value of the property.

Payoff of other secured or unsecured debt that financed energy-related improvements For limited cash-out refinances:
  • up to 15% of the appraised value of the property.

Renovation of an existing property to improve its energy efficiency For purchases or limited cash-out refinances:
  • up to 15% of the “as completed” appraised value of the property.

A lender does not need special approval to deliver HomeStyle Energy loans to Fannie Mae.

A lender may deliver a HomeStyle Energy mortgage loan with energy improvements as soon as the loan is closed. The energy-related improvements do not have to be completed when the mortgage is delivered to Fannie Mae. HomeStyle Energy loans are not subject to recourse.

The lender must establish a completion escrow for incomplete energy improvements. The improvements must be completed no later than 180 days from the date of the mortgage note. For requirements related to the completion of the postponed improvements, including escrow accounts, disposition of funds after work completion, and title reports, see the Requirements for HomeStyle Energy Improvements on Existing Construction table in B4-1.2-03, Requirements for Postponed Improvements.

Eligible Property and Occupancy Types

All one- to four-unit existing properties are eligible for the energy improvement feature with the exception of manufactured homes. All occupancy types are permitted.

Energy Report Requirements

Borrowers are required to obtain a residential or home energy report to identify the recommended energy improvements to the property and the estimated cost savings associated with those improvements.

The energy report must be reviewed by the lender and must

  • identify the recommended energy improvements and expected costs of the completed improvements;

  • specify the monthly energy savings to the borrower; and

  • verify that the recommended energy improvements are cost-effective. Energy improvements are determined to be cost-effective when the cost of the improvements, including maintenance, is less than the present value of the energy saved over the useful life of the improvements. (The cost-effectiveness of the improvements may be assessed in the aggregate and are not required to be assessed separately for each energy improvement.)

The report must meet at least one of the following standards:

  • A Home Energy Rating Systems (HERS) report completed by a HERS rater who is accredited under the Mortgage Industry National Home Energy Rating Standards (HERS Standards), as adopted by the Residential Energy Services Network (RESNET®). A list of accredited HERS raters by state can be located at RESNET’s website.

  • A Department of Energy (DOE) Home Energy Score Report completed by an independent third-party energy assessor with credentials obtained through one or more of the organizations listed as eligible under the DOE program. A list of acceptable organizations can be found on the DOE website.

  • A rating report completed by an independent and certified home energy consultant or auditor, comparable in rating methods and scope to the HERS or Home Energy Score evaluation, and that is permitted under a local or state level home energy certification or audit program.

The energy report must be dated

  • no earlier than 120 days prior to the note date; or,

  • if related to expenses previously incurred and being paid off with a refinance transaction, within 120 days of the energy-related expenses.

If the cost of the energy report is paid for by the borrower, the cost may be financed as part of the mortgage by including it in the cost of the energy improvements. The cost must be included on the settlement statement if it is financed in the mortgage loan.

Exceptions to Energy Report Requirements: Alternative documentation (other than an energy report) is acceptable in the following circumstances.

  • Weatherization items – If the mortgage transaction only involves financing the purchase of basic weatherization items (such as programmable thermostats and insulation) or water efficiency devices (such as low-flow showerheads) totalling less than $3,500, a residential energy report is not required. Acceptable documentation includes, but is not limited to, a copy of invoices or receipts for energy-related expenses or copies of contractor invoices for completing the basic weatherization items.

  • Payoff of PACE loans – Documentation must show that the funds are used solely to pay off the PACE loan obtained for energy improvements on the subject property.

Product Eligibility

Energy-related improvements are permitted on existing properties in conjunction with all standard Guide products and features including, but not limited to:

  • high-balance loans,

  • Community Seconds,

  • loans with deed restrictions (including programs that allow below market rate mortgages),

  • down payment assistance programs,

  • HomeReady loans, and

  • Community Land Trusts.

Energy improvements cannot be financed in the loan amount of a Refi Plus or DU Refi Plus loan. Loans with energy improvements are subject to the applicable LTV, CLTV, and HCLTV ratios found in the Eligibility Matrix (which can never exceed an LTV ratio of 95%).

Purchase Transactions: In a purchase transaction, the proceeds can be used to finance the acquisition of the property and the energy improvements. The LTV ratio is determined by dividing the original loan amount (including the cost of the energy improvements) by the lesser of the “as completed” appraised value of the property or the sum of the purchase price of the property and the cost of the energy improvements.

Limited Cash-out Refinance Transactions: When a mortgage loan is originated as a limited cash-out refinance, the loan must meet all of the standard requirements for limited cash-out refinances (as described in B2-1.2-02, Limited Cash-Out Refinance Transactions).

Energy-related improvements may be financed in the loan amount. Proceeds may also be used to pay off an existing PACE loan or other debt (secured or unsecured) that financed an energy-related improvement. The standard cash back allowance of the lesser of 2% of the loan amount or $2,000 is permitted on these loans.

For limited cash-out refinance transactions, the LTV ratio is determined by dividing the original loan amount (including the cost of the energy improvements) by the “as completed” appraised value of the property when the mortgage is being delivered prior to the completion of the improvements. If the appraisal was completed after the completion of the improvements, then the LTV ratio is determined by dividing the original loan amount (including the cost of energy improvement debt to be included in the loan amount) by the appraised value of the property.

Underwriting with DU

Mortgage loans with an energy improvement feature can be underwritten manually or through DU. However, DU is not able to identify the transaction as having an energy improvement feature and as such, will not issue any specific verification messages. The lender must confirm outside of DU that all requirements of the energy improvement feature described in this section are met.

For purchase transactions, the lender must include the cost of the energy improvements in the sales price in the online loan application in order for the cash to close and LTV ratio to be accurately determined. For limited cash-out refinance transactions, the inclusion of the cost of the energy improvements in the loan amount may make it appear that the borrower is receiving more than the allowable cash back at closing.

Because DU will be applying the standard limited cash-out refinance cash back policy, the loan casefile may receive an Ineligible recommendation when it appears the borrower is receiving more than 2%/$2,000 cash back. The lender may deliver the loan with the Ineligible recommendation and retain the DU limited waiver of underwriting representations and warranties provided the mortgage loan meets the requirements contained in this section (e.g., maximum cash back at closing) as well as those contained in A2-2.1-04, Limited Waiver and Enforcement Relief of Representations and Warranties for Mortgages Submitted to DU.

Manual Underwriting

For mortgage loans involving energy-related improvements that are underwritten manually, a maximum debt-to-income ratio of 38% is allowed. All other underwriting requirements, such as the down payment, credit score, and reserve requirements, are identical to those for a similar transaction with a maximum debt-to-income ratio of 36%. In addition, for all mortgage loans with debt-to-income ratios greater than 36% up to the maximum of 38%, a DOE Home Energy Score Report must be completed and the subject property must receive a Home Energy Score greater than 6 (or comparable industry standard measure that demonstrates the property has met the standards for increased energy efficiency).

Appraisal Requirements

All mortgage loans with energy improvement features require an appraisal based on an interior and exterior property inspection and must be completed on the appropriate form depending on the property type. When the mortgage is being delivered prior to the completion of the energy improvements, appraisers must determine the “as completed” value of the property subject to the energy improvements being completed. A certification of completion is required when the mortgage is delivered prior to the completion of the improvements. For requirements related to the certification of completion, see B4-1.2-03, Requirements for Postponed Improvements.

Lender Responsibilities

The lender is responsible for

  • ensuring that the appraiser has been provided with a copy of the energy report,

  • managing the escrow account in which improvement funds are held, and

  • monitoring the completion of the energy improvement work.

See the requirements related to the energy improvement feature in B4-1.2-03, Requirements for Postponed Improvements.

The lender must maintain a copy of all of the documentation in the individual mortgage file that supports the energy improvement work, such as the energy report, “as completed” appraisal, home improvement contract, certification of completion, and title insurance endorsements or updates (if applicable).

Loan-Level Price Adjustment Credit

Fannie Mae will credit the lender a $500 LLPA for mortgage loans that financed energy improvements on existing properties. See the Loan-Level Price Adjustment (LLPA) Matrix.

Special Feature Code

When delivering a mortgage loan with financed energy improvements, the lender must include SFC 375 as part of the delivery information. Lenders will not receive the $500 LLPA credit without delivery of SFC 375. See the list of Special Feature Codes on Fannie Mae's website.

Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2016–04 May 31, 2016
Announcement SEL-2016–03 March 29, 2016
Announcement SEL-2013–03 April 9, 2013
Announcement SEL-2011–03 March 31, 2011
Announcement SEL-2010–15 December 1, 2010