ENERGY EFFICENT MORTGAGES PART #5

Conventional EEMs

Fannie Mae also lends up to 5% for Energy Star new homes. Fannie Mae EEMs are available to single-family, owner-occupied units, and Fannie Mae provides EEMs to those whose income might otherwise disqualify them from receiving the loans by allowing approved lenders to adjust borrowers’ debt-to-income ratio by 2%. The value of the improvements is immediately added to the total appraised value of the home.

Freddie Mac offers EEMs for one- to four-unit dwellings and also helps raise the effective income of the borrower to qualifying levels by allowing lenders to increase the borrower’s income by a dollar amount equal to the estimated energy savings. Any energy efficiency improvements can qualify, and these mortgages can be combined with both fixed-rate and adjustable-rate mortgages. Borrowers should apply directly to the lender. See www.natresnet.org/resources/lender/default.htm for more details.

ENERGY EFFICENT MORTGAGES PART #4

Department of Veterans Affairs (VA) Energy Efficient Mortgages

The VA insures EEMs to be used in conjunction with VA loans either for the purchase of existing homes or for refinancing loans secured by the dwelling. Homebuyers may borrow up to $3,000 if only documentation of improvement costs or contractor bids is submitted, or up to $6,000 if the projected energy savings are greater than the increase in mortgage payments. Loans may exceed this amount at the discretion of the VA. Applicants may not include the cost of their own labor in the total amount. No additional home appraisal is needed, but applicants must submit a HER, contractor bids and certain other documentation. The VA insures 50% of the loan if taken by itself, but it may insure less if the total value of the mortgage exceeds a certain amount.

ENERGY EFFICENT MORTGAGES PART #3

FHA Energy Efficient Mortgages

In the last few years, FHA loans have become the loan of choice for people putting down around 5%. The FHA allows lenders to add up to 100% of energy efficiency improvements to an existing mortgage loan with certain restrictions. FHA mortgage limits vary by county, state and the number of units in a dwelling. See www.fha.com/lending_limits.cfm for more details. These mortgages were previously limited to $8,000. In June 2009, HUD issued Mortgagee Letter 2009-18 which announced the removal of the dollar cap. The maximum amount of the portion of an energy efficient mortgage allowed for energy improvements is now the lesser of 5% of:

• The value of the property,
• 115% of the median area price of a single-family dwelling, or
• 150% of the Freddie Mac conforming loan limit

Loan amounts may not exceed the projected savings of the energy efficiency improvements. FHA loan limits do not apply to the EEM. Presently, up to $200 of the cost of the HER may be included in the mortgage, and borrowers may include closing costs and the up-front mortgage insurance premium in the total cost of the loan. The loan is available to anyone who meets the income requirements for FHA’s Section 203 (b), provided the applicant can meet the monthly mortgage payments. New and existing owner-occupied homes of up to two units qualify for this loan.

ENERGY EFFICENT MORTGAGES PART #2

The Good & the Bad News of Energy Efficient Mortgages (EEM’s). EEM’s do exist, but to be honest I have not been able to find a single person who has done one. I am sure they out there, but they are far and few in-between.

Homeowners can take advantage of EEM to finance a variety of energy efficiency measures, including renewable energy technologies, in a new or existing home. The U.S. federal government supports these loans by insuring them through Federal Housing Authority (FHA) or Veterans Affairs (VA) programs. This allows borrowers who might otherwise be denied loans to pursue energy efficiency improvements, and it secures lenders against loan default.

In general, the idea is that the EEM allows the lender to:
1. Finance above the appraised value
In theory, this sounds like a reasonable idea. Then the appraiser does not necessarily have to take into account the energy efficient items and the lender can exceed the appraised value. In practicality, in the current real estate market, mortgage underwriters are already panicked about valuation after the last few years. Trying to explain this process to a mortgage underwriter who is not familiar with an EEM is like to talking Greek to a Texan. You just get that blank stare or silence on the other end of the telephone. As mentioned earlier, as “green” building gains some momentum and the industry gets trained, I am sure this will not be as big of an issue. For now, at Amaris, we make our best effort to build the cost into the normal appraisal and by-pass this entire headache.

2. Stretch the debt to income ratio for qualification
Again, similar to financing in excess of the appraised value, stretching the debt to income has the same challenges with the mortgage underwriter. Some programs allow this stretching the debt to income ratio, while other programs do not. The idea is that an energy efficient home will have lower utility bills forever. If you qualify for a mortgage of 2,500.00 per month and the utilities are going to be 250 per month, it only makes sense that a 2,600 per month mortgage payment with 150 per month utilities should not be a problem. With our customers, we do not stretch them in the qualification process and to be honest the trend by customers is fiscal prudence and they would not necessarily want to stretch financially anyway.

ENERGY EFFICENT MORTGAGES PART #1

One of the major issues we have run into with homes built “green” (e.g. LEED for Homes or Minnesota Green Standards) is that the appraisal industry is not trained to recognize and value the green aspects of “green” building. In recent years with price deflation caused by nearby foreclosed homes, it is nearly impossible at times get a fair hearing on the differentiation of a “green” home.
 
After the mortgage bubble and scams, appraisers, underwriters and the mortgage industry in general has little sympathy for a “green” builder trying to obtain a market appraisal taking into consideration the “green” aspects of the home. Building “green” absolutely does cost more, are better quality homes and have shown to demand higher resale pricing around the country, but none of that seems to matter when the appraisal comes in below the construction cost.
 
The required third-party certification and testing alone costs $3,000-5,000. There is a major disconnect between the folks making up the “green” certification programs and the appraisal and mortgage industry. If the buyer is putting down a significant down payment, the problem does not necessarily go away either. The lender may be satisfied because the down payment solves the problem for them; however the builder has to explain why he is charging more for the home than the appraisal amount. No one wants to over pay and a low appraisal is a red flag that becomes an issue that the builder has to sell through. In situations where the buyer is putting down a small down payment, then the transaction is lost.
 
Yes, there is a product out there called Energy Efficient Mortgage, but I have yet to find a mortgage lender, underwriter or appraiser who understands them and has experience with them. From a macro perspective, the mortgage industry is not trained on energy efficient mortgages and much work needs to be done to address the gap between “green” certification programs and appraisal standards. To the best of my knowledge, there is no official guidance for appraisers with regards to LEED for Homes or any other Green certified home program and there are no special forms or consideration required by FHA for appraisers.
 
In the meantime, we do our best to overcome this by providing the appraiser and lender with detailed documentation. We provide detailed “green” specifications outlining the complete details of the green building process. Our average, our “green” specification for a residential home is approximately 40 pages. These specifications alerts the appraiser and lender that something different is going on. Second, we provide a sworn construction statement outlining the energy efficient upgrades to make it easy for the appraiser and lender to identify those costs. Finally, while I don’t expect that vast majority of appraisers to grasp the detail of construction drawings, our drawings carry a fair amount of detail that coincide with the “green” specifications.
 
Does providing the detail matter? I know appraisers will all tell you they do their work objectively. To some degree that is true and some degree not true. I believe an appraiser may look at the data objectively but as they do, they develop a “number” in their head and work towards that number. Our supporting data is our effort to help an appraiser decide on the “number”.

Green Tax Benefits & Incentives Part #4

Does solar voltaic systems make sense in Minnesota? Let's take a look at combining the current federal tax credits, pending Minnesota state rebate program and net metering benefit to see if it all can make sense.
Example:
4KWp Solar Photovoltaic System approximate cost = $36,000 40,000
- MN State Rebate = -10,000 -10,000
- Federal Tax Incentive = - 7,800 - 9,000
Total Net Upfront Cost = $18,200 - 21,000

Cost to finance @6%, 30yr loan = $109.12 - 125.91 per month
Less: Net Metering (assumption) = - 58.33 - 58.33 per month (assumes 5 sun hours per day, 7,00 KWh per year at .10per KWh)
Monthly Out of Pocket = - 50.79 – 67.58 per month

The above is based on reasonable assumptions. However, each installation is different based on solar equipment & installation cost, equipment performance, sun hours per day, electricity cost, mortgage interest rate, etc.

Another way to look at it is what happens if you pay the net upfront cost with cash out of pocket. Assuming a $21,000 net out of pocket cost the cash on cash return is 3.3% on a tax free basis. Not the highest yield, but better than leaving your money in the bank.

Other Considerations:
- Other incentives may apply depending on location, rural area, utility provider, etc
- Utility companies charge much higher rates in the summer months and the net metering assumptions shown here may be conservative.
- Assuming you stay in your home for an average of seven years (the American average) the cost to you for owning the system is approximately $5,000.00 (e.g. 60 per mo). The loan balance on $21,000 after 84 months is $18,824. If there is a twenty year life, the remaining value after seven years works out to $26,000.00. The question is will the home sell for more than the $24,824 ($18,824 + $5,000) you have invested in the solar system at that point? Not very likely since the out of pocket cost new was only $21,000.
- Your home WILL produce significantly less carbon. While there is no financial incentive to monitor carbon emissions at this time, the cap and trade bill in congress is trying to do just that. A carbon tax would most likely change these calculations considerably.
- You are less likely to have power loss in hot summer days.

So there you have it; as far as I can calculate, installing solar photovoltaic panels in Minnesota is not a net zero cost. For comparison purposes, the $21,000 cost in this example is on par with what it would cost to moderately finish an average basement.

Would you install solar photovoltaic panels given these economics?

Green Tax Benefits & Incentives Part #3

Frequently Asked Questions:

Question #1 - If I don’t have to file income taxes, can I still get the energy efficiency tax credit?
Answer – According to the IRS the tax credit is technically “non-refundable” which means at the end of the year you cannot get back more from the Federal Government than you paid in.

Question #2 – Is there an upper limit on tax credits?
Answer - There is no upper or lower limit on income for the energy efficient tax credits

Question #3 - Are the energy efficient tax credits limited by the Alternative Minimum Tax (AMT)?
Answer - For 2009 the energy efficient tax credits are NOT limited by the AMT. "Section 25 D" products (which include geothermal, solar, and wind, at 30% with no upper limit) are NOT limited by the AMT at all. "Section 25C" products (which include insulation, windows, doors, roofs, HVAC, and non-solar water heaters, at 30% up to $1,500) are NOT limited by the AMT in 2009, but are currently limited by the AMT in 2010, unless Congress amends the law.

Question #4 - Can the energy efficiency tax credit be carried over to future years?
Answer - The tax credit for products at 30% up to $1,500 CAN NOT be carried over to future years. You can't even carry forward tax credit dollars from 2009 to 2010. But you can take part of the $1,500 in 2009, and the rest in 2010 - if they are for separate purchases (ex: you spend $3,000 on windows in 2009 and get a $900 tax credit on your 2009 taxes, then spend $2000 on an air conditioner in 2010 and get a $600 tax credit on your 2010 taxes).

The tax credit for the following products at 30% with no upper limit CAN be carried forward to future years:
• Geothermal Heat Pumps
• Solar Panels
• Solar Water Heater
• Small Wind Energy Systems
• Fuel Cells

You can carry forward the credit as long as the credit is still in effect. In this case, the credit is in effect through 2016. The energy efficiency tax credit is technically "non-refundable" which means at the end of the year, you can't get back more in credits than you paid to the government in taxes throughout the year. If you are unable to claim the entire 30% of your purchase for the above products, you can carry forward the unclaimed portion to future years through 2016.

The tax credit for insulation, windows, doors, roofs, HVAC, biomass stoves, and non-solar water heaters CAN NOT be carried over. These credits are for 30% of the cost, up to $1,500 in 2009 and 2010

Question #5 – What is the maximum tax credit I can get for the energy efficient home improvements?
Answer - Many of the energy efficiency tax credits are limited to $1,500 combined total for 2009 and 2010. The $1,500 maximum tax credit covers insulation, windows & doors, roofs, HVAC, biomass stoves, and non-solar water heaters.

Improvements not affected by the $1,500 cap (and in effect through 2016) include:
- Geothermal heat pumps
- Solar water heater
- solar energy systems
- small wind energy systems
- fuel cells (up to $500 per .5 kW of power capacity)
You can get both the 30% tax credit (up to $1,500) and the 30% tax credit (with no upper limit). For example, you could replace your windows and get $1,500, and purchase a new geothermal heat pump and get an additional 30% tax credit (with no upper limit). However, these are non-refundable tax credits, so you can't get more back in tax credits than you pay in federal income tax. The tax credits that are not limited to the $1,500 cap can be carried forward to future years.

Even if you received the full $500 for the tax credits back in 2006 or 2007, you are still eligible for the full $1,500 in 2009 and 2010

Question #6 - What parts of a geothermal heat pump are covered by the tax credit?
Answer - The majority of the geothermal heat pump property and it's installation is covered by the 30% tax credit. All geothermal heat pump components certified by the manufacturer in the "Manufacturer Certification Statement" will be covered. There may be some add on components that will not be covered such as an emergency back-up system and the ducts. These components are not directly related to the efficiency of the covered geothermal heat pump property

Question #7 - How can I determine if I can collect the tax credit? Does it matter if I am getting a tax refund?
Answer - Whether or not you are getting a refund does not matter. What matters is your "tax liability" - which is the total amount of federal income tax you are responsible for paying.

These energy efficiency tax credits are technically "non-refundable" which means you can't get more money back in tax credits than you pay in federal income taxes (your tax liability). Check your last year's tax return to get a sense of your tax liability (line 61 on the 2008 1040 form, called "total tax"). You can claim all of your tax credits as long as your tax liability, is greater than zero after all tax credits have been applied.

For example, say your Adjusted Gross Income (AGI) is $50,000, your tax liability is $10,000 (before you apply tax credits), and you've had $12,000 withheld from your paychecks. In this scenario you could claim up to $10,000 in tax credits. If you are eligible for the entire $1,500 tax credit, then your tax liability ($10,000) would be reduced to $8,500. Since you already had $12,000 withheld, you will get a tax refund of $3,500 ($12,000 - 8,5000 = $3,500).

If your AGI was $50,000, your tax liability $10,000 (before tax credits were applied), and you had $8,000 withheld from your pay checks, you would still have the ability to claim up to $10,000 in tax credits. If you are eligible for the entire $1,500 tax credit, your tax liability ($10,000) would be reduced to $8,500 and you would owe the government $500 at the end of the year ($8,000 already paid in taxes - $8,500 tax liability = $500 final payment).

Green Tax Benefits & Incentives Part #2

Below is an overview of some the programs available and web sites to do additional research.

Federal Tax Credit: 30% of cost up to $1,500
Expires: December 31, 2010
Details: Must be an existing home and your principal residence. New construction and rentals do not qualify.
Covers: Biomass Stoves, HVAC (Advanced Main Air Circulating Fan), Insulation, Roofs, non-solar water heaters, windows and doors.

Federal Tax Credit: 30% of cost up with no upper limit
Expires: December 31, 2016
Details: Must be an existing or new home and your principal residence. Rentals do not qualify.
Covers: Geothermal Heat Pumps, Small Residential Wind, Solar Water and Photovoltaic Systems

MN State Sales Tax Incentive: 30% of cost up with no upper limit
Expires: No Expiration
Details: 100% sales tax exemption
Covers: Solar Water Heat, Solar Space Heat, Solar Photovoltaic, Small Wind

MN State Rebate Program:
Expires: When funds are exhausted
Details: $1.75 watt DC (up to $8,750) or $2.00 watt DC ($10,000) if installed by a NABCEP certified installer
Covers: Solar Photovoltaic up to 5KW

MN State Rebate Program:
Expires: When funds are exhausted
Details: $30.00 per square foot net aperture to a maximum of the lesser of 25% or $2,500 for new systems
Covers: Solar Water Heat

Xcel Energy Utility Rebate Program
Expires: Not Listed
Covers:
Central A/C: $180-$330, depending on efficiency
Air-source Heat Pumps: $180-$330, depending on efficiency
Geothermal Heat Pumps: $150/ton
Furnaces: $75-$100, depending on efficiency
Boilers: $100
Water Heaters: $40-$60 (standard); $100 (tankless)http://www.xcelenergy.com/SiteCollectionDocuments/docs/Home-Performance-Rebate-SignUp.pdf
Note: Utility rebates vary by utility provider

MN Net Metering
Expires: N/A
Details: Net metering allows a small electricity generator (e.g. residential home) to interconnect to the transmission grid and sell unused electricity back to the utility at the end of the month. Wind energy systems less the 40kw in size are eligible for net metering (Rule 7835 and Statute 216B.164)
Covers: Photovoltaics, Landfill Gas, Wind, Biomass, Hydroelectric, Municipal Solid Waste, CHP/Cogeneration, Anaerobic Digestion, Small Hydroelectric, Other Distributed Generation Technologies

Web Sites to check for more information:
http://www.dsireusa.org/
http://energytaxincentives.org/
http://www.energystar.gov/index.cfm?c=tax_credits.tx_index

Green Tax Benefts & Incentives Part #1

Would you buy a better performing car that will cost you less to own if the government paid you the difference between the car you can afford and the better performing one? Most people would not have to think very long or hard about that answer. The answer is a resounding yes! The question is, does it really work out that way when it comes to homeowner tax credits and incentives?

When it comes to green building there are a number of federal, state and local tax credits and other incentives that may affect building decisions. It is important to understand these tax benefits and incentives early on in the building process so you can properly determine which materials and equipment you may want to install.

Because tax credits and incentives are always a moving target, many builders are not very well schooled on what is available and how it can impact their prospective buyers. The unfortunate thing is the customer is getting cheated out of having the opportunity to decide one way or the other.

For example, there is currently a 30% tax credit through December 31, 2016 for Geothermal Heat Pumps. There is no upper limit on the tax credit. Let’s see how that might apply to the decision you make for the HVAC system in your new home. In an average 2,000-2,800 square foot two story home, a builder can install a HVAC system for approximately $10,000- $17,000. You can certainly spend much more, but you would be overspending. You can pretty much buy the best forced air HVAC system for about $17,000 or even a dollar or two less. This would include a 95% AFUE furnace with full modulating fan, 15 SEER Heat Pump A/C, zone controls, fully programmable thermostats, steam humidifier, etc.. The system would be fully ducted (meaning the return air vents would not just use wall cavities) and all ducts would be completely sealed. In our homes, this is our minimum “builder” standard. However, some builders might put in the cheapest system building code will allow and the cost can be trimmed down to as little as $10,000-$11,000 dollars. If you were to install a Geothermal system, the cost might be 25,000 to 28,000. However, the tax credit is 30% so the final net cost to you after tax credit would be $15,000 to $19,600. If you knew this information, would it affect your decision? My guess is you would at least want to know what the options are so you could fully consider them.

Over the next few days, let’s take a closer look at the tax federal and state tax credits and incentives that are currently available. The review is not meant to be exhaustive, so you may need to do additional research in your area. For sure, if your builder cannot answer questions about tax credits and incentives, keep looking.