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Factoring in Energy to the Cost of a Home

How much house can you afford? Lenders typically factor in loan principal, interest, taxes, and insurance when determining how much mortgage a buyer can afford. Not taken into account are energy costs, which can be more costly than insurance and in some cases taxes.

Senators Michael Bennet (D-CO) and Johnny Isakson (R-GA) want to change that. They have sponsored a bill that would require Fannie Mae, Freddie Mac and the FHA to consider energy costs when underwriting loans. “This would allow folks to retrofit their homes and be rewarded for it over the life of the loan.” Along with the incentive to go green, the proposal aims to give borrowers more information about energy costs, and home builders a way to account for the costs of building more energy efficient homes.

Fannie and Freddie would create some type of energy rating system to factor in energy costs and efficiency improvements or use the Home Energy Ratings System, known as the HERS index in the industry. A home’s value would be graded on how it stacks up with comparable homes and factored into an appraisal. For example, a home that uses 30 percent less energy than the average home could get an added $8,000 of value.

Builders have been trying to get lenders to factor in cost savings from green construction without much luck. Richard Kettler, of Kettler Forelines homes says when he builds Energy Star-rated homes, not a single appraiser considers adding on to the home’s value as a result. “It seems like common sense that if the monthly utility cost goes down, the borrower ought to be able to handle a larger loan,” Kettler said.

Builders also want to be able to recoup their costs of mandated energy efficiency requirements. Randy Melvin of Winchester Homes says those savings should be included, “if the saving is not recognized by the underwriting process, it's going to make homes less affordable for people and knock people out of the market.”

The bill has support from the U.S. Chamber of Commerce, builders, and some environmental groups. But not everyone is crazy about the idea.

The National Association of Realtors is worried that adding energy costs to the value of a home could make it harder for consumers to qualify for purchases of older homes that may be less energy efficient. “As the nation attempts to remove the glut of foreclosed housing from the marketplace, we can ill afford anything that will further constrain a housing sector recovery,” the Realtors said in an e-mail statement.

Senators Bennet and Isakson call the SAVEAct a “common-sense bill,” and say it has the potential to create more than 80,000 jobs without any budget cost.

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