• An energy efficient mortgage is based on the premise that with reduced energy costs a homeowner can afford a larger mortgage payment. Energy efficient homes cost less to own than other types of homes because of the incurred savings on energy-related costs, such as heating and cooling. With a Federal Housing Administration (FHA) energy efficient mortgage, the borrower is not required to pre-qualify for a higher loan amount. The mortgage is financed by a lending company and insured by the federal government.
  
  

HERS Report

• At the borrowers request, an independent energy consultant will conduct a home energy rating system (HERS) report, concerning the home's energy efficiency rating. A HERS report provides the home's current energy status and also provides information on how energy efficiency may be improved. This report also provides cost estimations for recommended improvements. A lender may be able to provide information concerning energy consultants available to conduct energy rating inspections.
  
  

Upgrades

• If the property is not energy efficient, borrowers may finance upgrades by using an FHA 203(k) loan. For inclusion in the loan, upgrades must be cost effective; the total cost of the upgrades must be less than the current estimated value of energy that would be saved throughout the term of the mortgage. Energy efficient upgrades are installed after the closing date and work on the upgrades must commence within 30 days following the signing of the mortgage agreement.
  
  

Eligibility

• Borrowers must meet income requirements for FHA's standard section 203(b) insurance and also have the ability to make monthly mortgage payments; investors are not allowed to borrow under this program. A borrower must meet standard FHA credit qualifications, which typically examine the borrower's most recent two-year credit history. FHA lenders may overlook some adverse credit issues, with reasonable explanation, such as illness or job loss.
  
  With an energy efficient mortgage, the borrower is eligible for approximately 97 percent financing. The borrower must finance the mortgage insurance premium and is also responsible for an annual premium. Eligible properties are one to four unit structures.