Sw creative financing 2 25

Creative Financing, Energy, and Design Options for the Residential Market

David LantzOwnerShelterwood [email protected]

Welcome

This seminar is intended for homeowners, lenders, appraisers, and realtors

We will outline the many financing options available to help stimulate the existing housing market

Creative financing options will help everyone incorporate energy and design upgrades into older, well located homes

Agenda

Energy Improvement Mortgages: Case Studies

Financing options▫ FHA 203(k) loan program▫ VA energy mortgage program▫ FHA energy mortgage program▫ Freddie Mac energy mortgage program▫ Fannie Mae energy mortgage program

RESNET energy rating Estimating energy savings

Energy Improvement Mortgage (EIM):What We Stand to Gain

Lower cost of ownership for homeowners Pollution reduction for the environment Better home resale value Bigger and more secure loans for banks Construction work for local contractors

Energy Improvement MortgagesCase Studies

The Roebels in Cincinnati, Ohio

Want to refinance Want to lower

monthly expenses Own an 89-year-

old, two-story bungalow

$8000 cap for FHA EIM

Wish list of energy improvements

Home Energy Rating Results

2x4 stud walls were uninsulated▫ Insulation would require an expensive electrician

retrofit Foundation walls were uninsulated and had water

penetration issues Attic and knee walls were poorly insulated Rim joists were uninsulated and leaky Furnace and water heater were inefficient, open-

combustion models Single-pane, double-hung wood windows were

rickety Whole home air leakage was 16 ACH at 50 Pa


Measure Cost Savings

New vinyl windows U-29, SHGC-0.29*

$4,488

$358/yearNew closed-combustion water heater

$400

Rim joist insulation and air sealing with DIY kit

$300

Total $5,188

Month Cash Flow $27/month** $30/month

Estimated 20% air leakage reduction resulting from new windows and rim joist insulation.

*Windows also qualify for an additional 30% tax credit.**The monthly finance cost is the monthly payment, including interest, that will pay for all the tabulated improvements when they are financed with a 30-year fixed mortgage at 4.75%.

Results

Underwriters decided to only provide funding for windows▫ Does not show positive NPV as a stand alone

improvement according to rater Whole house air leakage was reduced by

23%

Lessons Learned

All members of the EIM team need to work together and have faith in the goal of EIMs▫ Realtors understanding▫ Lenders cooperation▫ Homeowners patience and persistence▫ Flexible terms from energy contractors

Jane’s New Home Purchase in Cincinnati

90-year-old energy guzzling home

Required major rehab to remedy the energy inefficiencies

Goal to include energy improvements costs in the mortgage


Measure Cost

New roof and decking $7,000

Chimney repairs $1,000

Electrical modernization $5,000

HVAC; new dual-fuel heat pump and duct repairs $7,500

Water heater replacement to tankless model; requires chimney repair $2,200

Insulated and air-sealed ceiling $1,600

Insulated walls in 2x4 stud cavities $4,300

Insulated foundation walls and air sealing rim joist cavities $1,700

Total Added Cost to

Mortgage

Extra Monthly Finance Cost

Monthly Energy Savings

Monthly Cash Flow

~$30,000 $140 $260 $120

Finance Options and Challenges

FHA EIM ▫ Limit is $8,000 so $22,000 will need to be financed

elsewhere 203(k) mortgage

▫ Allows up to $35,000 but requires a larger down payment Solution

▫ EIM loan in conjunction with the 203(k)▫ Line item certain improvements with EIM which requires no

down payment▫ Cosmetic and structural improvements done with 203(k)

Purchase price of $140,000 plus $30,000 improvements equals a mortgage of $170,000 ▫ Neighborhood comps sell for $160,000 but have higher

energy costs

Not an Ideal Outcome

Due to comp values, she only secured $20,000 worth of financing not the $30,000 required▫ New roof▫ Chimney repairs▫ Electrical work▫ New HVAC system

203(k) secured $13,000 EIM secured $7,000 She didn’t achieve the “Energy Efficient”

upgrade to her home

Getting the Ideal Outcome

If Jane had done the complete renovation her mortgage would have been $170,000

Her home would have a greater intrinsic value than her neighborhood’s inefficient homes

Her neighbor’s would have smaller mortgage payments, but higher energy bills

The Energy Efficient Mortgage:A Solution to the Mortgage Problem

The Energy Efficient Mortgage (EEM) is a loan for efficient homes that don’t need improvements

The bank regards utility savings as an extra income source for prospective home buyers

EEM is insured and less risky for banks What if Jane’s home were automatically

prequalified for an EEM? What if potential buyers were automatically

offered more-flexible financing in the form of an EEM?

Energy Financing Programs Can Drive the Home Renovation Economy

If the industry can successfully build upon the three solutions described here▫ Bigger loan caps for needed improvements▫ Stackability with other loan programs▫ More rewards for homes that prove

themselves efficient We will see the emergence of an extreme

energy makeover movement

Financing Options

FHA Section 203(k) Loan ProgramTurning “Fixer-Uppers” into Dream Homes

What Is a 203(k) Loan?

Allows a borrower to purchase or refinance a home including additional money for repairs or renovations▫ Rehabilitate a foreclosed property▫ Update a property▫ Fix a required repair▫ Add a room addition

Amount financed is based on the projected value of the property after rehabilitation

203(k) Mortgage Background

Established by congress in 1978 Allows banks to develop new business

while mitigating risks▫ Provides government-backed mortgage

insurance Assists in the revitalization and

stabilization of neighborhoods negatively impacted by the current foreclosure crisis

Two Types of 203(k) Loans

Standard▫ Extensive structural work▫ Repair costs exceed $35,000▫ Loan maximum is 110% of the “as-improved”

value Streamlined

▫ Places fewer demands on borrower▫ Maximum of $35,000 in repair costs▫ Use of FHA-designated consultant not

required

203(k) Mortgage Details

Loan down payment can be as low as 3% Property must be used as a principle

residence by an individual or family $5,000 is minimum amount financed

for renovation Six months of mortgage payments can be

included in the financing

Examples of Repairs Allowed

Kitchen or bathroom remodel Replacing roof, gutters, and

downspouts Adding a family room,

bedroom, or bathroom Replacing flooring, tiling, or

carpeting Completing basement, attic,

or adding second story Expanding or building a

garage Renovating a deteriorating

property▫ Repairing structural damage▫ Repairing termite damage

Upgrading plumbing, heating, air conditioning, or electrical wiring

Eliminating health and safety hazards (eg, lead paint)

Making the home accessible to the disabled

Installing a well or a septic system

Adding a porch, deck, or patio Adding or repairing siding or

repainting Installing energy efficient

windows or doors

203(k) Loan Process

Find a home to purchase and rehab Choose to rehab current residence

Find a home to purchase and rehab Choose to rehab current residence11

Work with an FHA-approved lender Work with an FHA-approved lender22

Meet with FHA-approved fee consultant and contractor at property to determine “required vs desired” improvements

Meet with FHA-approved fee consultant and contractor at property to determine “required vs desired” improvements

33

203(k) Loan Process (cont.)

FHA fee consultant prepares work write-up

FHA fee consultant prepares work write-up44

Lender gives construction plan to FHA-approved appraiser to determine “as-improved” value

Lender gives construction plan to FHA-approved appraiser to determine “as-improved” value

55

Direct endorsement lender underwrites loan

If approved, closing is scheduled

Direct endorsement lender underwrites loan

If approved, closing is scheduled66

203(k) Loan Process (cont.)

Loan is closed and is FHA insured Rehab funds are placed in escrow

Loan is closed and is FHA insured Rehab funds are placed in escrow77

Work begins FHA fee consultant approves draws as

work is completed to pay borrower/contractor

Work begins FHA fee consultant approves draws as

work is completed to pay borrower/contractor

88

After completion, lender releases 10% holdback on all contracted work

After completion, lender releases 10% holdback on all contracted work99

Energy MortgagesThe Key to Unlocking Residential Energy Efficiency

Two Types of Energy Mortgages

Energy efficient mortgage▫ Uses energy cost savings from a home that

is already energy efficient to increase buying power and capitalizes the improved features into the appraisal

Energy improvement mortgage▫ Finances the energy efficient improvements

using projected energy cost savings Both rely on the home’s energy rating to

calculate generated efficiency savings

VA Energy Mortgage Program

VA Energy Mortgage Details

Use for purchase or refinance 100% of energy improvement financing

▫ Up to $3,000 based on documented installation costs

▫ Up to $6,000 provided the projected energy cost savings exceed the increase in mortgage payment

No additional down payment if energy improvements create positive cash flow

Total loan amount including improvements cannot exceed VA limit

VA Energy Mortgage Details (cont.)

Final LTV may exceed 100% if energy improvements have positive cash flow

All improvements identified as cost-effective by home energy rating are eligible

180 day installation limit Documentation

▫ Home energy rating▫ Contractor bid▫ Certificate of reasonable value▫ Loan analysis worksheet▫ Report and certification of loan disbursement

VA Energy Mortgage Example

Appraised Value of Home

$120,000

Interest Rate 8.5%

Term of Loan 30 Year

Cost of Energy Improvements

$3,400

Projected Monthly Energy Savings

$32.50

Monthly Mortgage Payment Increase

$26.14

Loan is approved ▫ Monthly energy

savings from the rating exceeds the added monthly mortgage payment

FHA Energy Mortgage Program

FHA Energy Mortgage Details

Use for purchase and refinance of one- or two-unit owner occupied home

Finance up to $4,000 or 5% of the appraised value (maximum of $8,000)

The LTV may exceed 100% of appraised value when energy rating shows combined improvement value is greater that cost of upgrades

Can include all improvements identified as cost-effective by home energy rating

FHA Energy Mortgage Details (cont.)

90 day limit for installation Documentation

▫ Home energy rating▫ Contractor bid▫ HUD B Worksheet

FHA Energy Mortgage ExampleStandard Loan

Home Sale Price $60,000

Interest Rate 8.0%

Closing Cost $1,200

Cost of Energy Improvements $3,000

Average Life of Measures Calculated by Rating

10 Years

Monthly Energy Savings $40

Standard Underwriting

Sales Price $60,000

Appraised Value $60,000

Closing Cost $1,200

LTV 97.75%

Loan Limit $58,640

FHA Energy Mortgage ExampleEnergy Improvement Loan

Standard Loan Calculation $58,640


Average Life of Measures Calculated by Rating

10 Years

Annual Energy Savings $480

Energy Premium (calculated by energy rating software)

$3,220

New Loan Amount

Standard Loan Calculation $58,640

Energy Improvement Mortgage $3,000

New Loan Amount (no additional down payment nor income required to qualify)

$61,640

Freddie MacEnergy Mortgage

Freddie Mac Energy Mortgage Details

Use for purchase and refinance of one to four owner occupied units

No limit to amount financed for energy improvements if supported by value

Requires a down payment related to the LTV of the loan including energy improvements

Principle, interest, insurance, and taxes (PITI) of loan increases dollar-for-dollar to reflect energy savings projected by energy rating

Value of energy rating improvements added to appraised value

Freddie Mac Energy Mortgage Details (cont.)

Loan amount including energy upgrades cannot exceed 95% LTV

All improvements recommended as cost-effective by energy rating are eligible

Installation may take up to 120 days Documentation

▫ Home energy rating

Freddie Mac Energy Mortgage Example

Interest Rate 8.0%

Borrower’s Monthly Income $2,900


Projected Monthly Energy Savings from Rating

$75

Freddie Mac Energy Mortgage Example (cont.)

ConventionalMortgage

Energy Improvement

Mortgage

Home Purchase Price $100,000 $103,000

Down Payment $10,000 $10,307

Mortgage Qualified for $90,000 $100,200

Monthly PI Qualified for $660.39 $735.39

Taxes and Insurance $139.61 $139.61

PITI $800.00 $875.00

Less Monthly Energy Savings

$0 $75

Adjusted LTV 90% 97%

Consumer Buying Power $90,000 $100,221 With the same income, a consumer can afford an additional

$10,200 mortgage amount while capturing a $75/month energy savings

Fannie Mae Energy Mortgage

Fannie Mae Energy Mortgage Details

Use for the purchase or refinance of one to four owner occupied units

Finance up to 15% of the home’s appraised value for cost-effective energy improvements

No additional down payment is required for the financed energy improvements

Dollar-for-dollar estimated savings is added to the maximum allowable PITI monthly payment

Value of energy rating improvements added to appraised value

Fannie Mae Energy Mortgage Details

Value of energy improvement measures added to LTV calculation

All improvements recommended as cost-effective by energy rating are eligible

Improvements may take up to 6 months Documentation

▫ Home energy rating▫ Fannie Mae Form 1224, “Energy Efficient

Mortgage Underwriting Adjustment Report”

Fannie Mae Energy Mortgage Example

Purchase Price $100,000


Projected Monthly Energy Savings from Rating

$50

Fannie Mae Energy Mortgage Example (cont.)

ConventionalMortgage

Energy Improvement

Mortgage

Home Purchase Price $100,000 $103,000

Down Payment $10,000 $10,000

Mortgage Qualified for $90,000 $93,000

Monthly PI Qualified for $614 $634

Less Monthly Energy Savings

$0 $75

Monthly Housing Cost $614* $584 With the same income, a consumer can afford an additional

$3,000 mortgage amount while capturing a $50/month energy savings

*Not including monthly energy costs.

Energy Loan Summary

Both energy improvement and energy efficient home loans require energy rating services

Loans offer the consumer a “better deal” on financing energy efficient improvements

RESNETResidential Energy Services NetworkMark QuigleyRESNET Certified Energy RaterEnergy ConsultantShelterwood

Energy Efficiency: “The First Fuel”

Why the “First Fuel”?▫ Least cost carbon mitigation option▫ Only near-term resource option▫ Available everywhere in large amounts▫ Best economic strategy

How can we mine the “First Fuel”?▫ Energy policies that overcome barriers▫ Climate policies that use EE effectively▫ Better delivery infrastructure: Financing

Why Buildings Are Important

Residential and commercial buildings account for 70% of US electricity consumption

Why Buildings Are Important (cont.)

Residential and commercial buildings account for 39% of US carbon dioxide emissions

The Average American Home1

1. RECS 2001: http://www.eia.doe.gov/emeu/recs/2. Brookings Institute

107 million residentialhousing units in 2001

10,700 kWh a year inelectricity

700 therms natural gas▫ Or 730 gallons fuel oil▫ Or 488 gallons LPG

~12.5 tons of CO2

▫ ~8.3 tons from electricity Represents 21% of US primary energy use Most important: 75% of all buildings that will be in use

in 2050 are already built2

Steps That Need to Be Taken

Adopt policies that overcome market barriers that prevent maximizing the full economic potential of energy efficiency

Adopt climate policies that exploit energy efficiency

Provide affordable and accessible financing

What Is RESNET?

An industry-based, not-for-profit membership corporation▫ Membership composed of program

administrators, raters, and allied industries▫ Governed by a board of 21 elected by

membership A national standards making body for building

energy efficiency rating and certification systems in the USA▫ Consensus based standard development and

amendment process▫ Transparent review and adoption process▫ Formal public review and comment process

Building Energy-Efficiency in US

RESNET Ratings (2007)▫ 139,907 homes rated as 15% over standard

energy performance ▫ 13.4% of new homes

▫ 23,702 homes were certified as complying with federal tax credit ▫ 50% more efficient than code▫ 2.3% of new homes

The Zero Energy “Yardstick”

A national energy use index Measures whole-home energy

performance on a relative scale ▫ 100 = energy use of the

“American Standard Home”▫ 0 = no net purchased energy

use (the “Zero Energy Home”)

Energy Star homes have a HERS Index ≤ 85

Widely used in the “Beyond Code” marketplace

HERS = Home Energy Rating System.

Status of Federal Tax Credits

$2,000 builder credit▫ Extended to January 1, 2010

NAHB/Senator Snowe and Feinstein Proposal▫ $5,000 for reaching 50 HERS Index

Existing Homes Credit – extended and expanded▫ 30% of cost, up to $1,500 (Energy Star web

site)

National Energy/Climate Change Legislation

Comprehensive review of energy and environmental policy▫ Expected to be introduced this spring

Improved building performance expected to be included as part of legislation

Home energy performance profiles may become mandatory for presale homes in many EU countries

Bloomington energy lobbyists are pushing to require that all new Monroe County home are Energy Star Qualified

Estimating Energy SavingsIdentifying Energy Efficiency Opportunities in Existing Homes

Estimating Energy Savings

Rater performs home inspection to gather data about a current energy characteristics

Rater enters data into REM/Rate™ software to calculate energy rating score▫ REM/Rate™ software is used by most

RESNET raters▫ Accurate at determining energy usage in

new and existing homes

Home Energy Rating System (HERS) Index

Rating from 500 to 0▫ 0 = Zero energy home

100 = 2004 IECC code home 1 point = 1% energy usage Energy Star = 85 points

▫ + thermal bypass checklist▫ 1 Energy Star product category▫ ≤ 6 CFM/100 sq ft duct leakage to the

outside of floor area, etc.

Preserves Natural Resources

5 TCF of Natural Gas

In 1970, used to heat 35 million homes

Today, used to heat 58 million homes

TCF = trillion cubic feet.

Tools of the Trade

Blower Door

Duct Blaster

Infrared Camera

Flow Hood

Duct Mask

Fogger

Case Study: 1950 Ranch in Lexington, KY

No wall insulation R-19 ceiling Double pane glass 15% glass to wall Vented crawl R-19 floor R-19 attic 78 AFUE furnace 10 SEER A/C 300 CFM duct leakage $1/therm $0.08/kWh

List of Measures to Consider

Air infiltration Wall insulation Closed crawl perimeter insulated Duct leakage Furnace replacement Heat pump replacement Ceiling insulation Air conditioner replacement Lighting

Air Infiltration Rim/band Attic

penetrations Sill plate

Windows

AtticHatch

Plumbing

Ceiling Lights

Wiring

Floor

Foundation

Floor

Chimney

ExteriorDoors

Typical Sources of Air Leakage in the Home

Penetrations

Top Plate

Air Sealing/Infiltration ControlWhat Is Infiltration?

Air Infiltrations

Can we get the house too tight? Ventilate ASHRAE 62.2 Some say ASHRAE 62.2 over ventilates Maintain relative humidity 30-50%

REM/Rate Improvement Analysis

REM/Rate Improvement Analysis (cont.)

Wall Insulation Dense pack Cellulose Foam

Crawl Space Moisture Problems

Symptom: Light Mold Spotting in Crawl Space

Typical Response: Add Ventilation

Resulting Mold Explosion

85 F60% RH70 F DP

73 F90% RH70 F DP

Framing: 70-78 F

Ducts: 55-65 F

H2O Pipes: 55-65 F

Floor: 65-70 F

50

60

70

80

90

100

6/3 6/13 6/23 7/3 7/13 7/23 8/2 8/12 8/22 9/1

Rela

tive H

um

idit

y (

%)

Wall Vented ClosedOutside

Phase I Crawl Space Relative Humidity

Crawl Space Walls

Duct Sealing:What’s Missing From This Picture?

Mechanical Systems

Furnace Replacement

Replace 78 AFUE with 95 AFUE 30% up to $1500 tax credit Downsize with improvements

Heat Pump Scenario

10 SEER 6.8 HSPF Replace with 14 SEER 8.5 HSPF

Air Conditioner Replacement

10 SEER to 14 SEER Downsize

Complete Package With Furnace

Show Me the Money

Positive cash flow Simple payback

▫ Cost divided by savings Return on investment

▫ Savings divided by cost

Return on Investment

Conservative▫ 9.4 %

Complete Package With Heat Pump

Return on Investment

Conservative▫ 18.6 %

Dow Jones Industrials

Resources

Cut Your Energy Bills Now-150 Smart Ways to Save Money and Make Your Home More Comfortable and Green ▫ Bruce Harley, The Taunton Press $12.95

Insulate and Weatherize▫ Bruce Harley, The Taunton Press $19.95

Read This Before You Buy, Build, or Renovate▫ BuildingScience.com, Information▫ http://tinyurl.com/5nhbzl

110

Thank You

Questions

David LantzOwner

Office: 812-333-2991Cell: [email protected]

Mark QuigleyEnergy Consultant

Office: 812-333-2991Cell: [email protected]

www.prairiegreenhomes.com

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