Summary:
Homeowners can take advantage of energy efficient mortgages (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.
The federal Energy Star program has a partnership program for lenders whereby lenders who provide EEMs to borrowers may become Energy Star lender partners. These EEMs may or may not be used to purchase an Energy Star qualified home. Becoming a partner allows lenders to utilize the Energy Star brand to promote themselves as Energy Star partners offering EEMs. To become a lender partner lenders must first provide proof that they know how to write EEMs. To maintain their partnership benefits, lenders must write a certain number of EEMs per year. Energy Star does not have a lender certification program or process. Click here for more information about Energy Star's lender partnership program. As of August 2008, the federal Energy Star program lists 61 private lenders who offer homebuyer assistance, HERS assistance, special financing, and other assistance to applicants buying homes with the Energy Star rating. Energy Star requires that its lender partners provide EEMs to qualified borrowers regardless of whether it is an FHA EEM, Fannie Mae EEM, or VA EEM.
FHA Energy Efficient Mortgages
The FHA allows lenders to add up to 100% of energy efficiency improvements to an existing mortgage loan by insuring a loan of up to 5% of a home’s appraised value 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.
Loan amounts may not exceed the projected savings of the energy efficiency improvements. These loans may be combined with FHA 203 (h) mortgages available to victims of presidentially-declared disasters and with financing offered through the FHA 203 (k) rehabilitation program. FHA loan limits do not apply to the EEM. Homebuyers must submit a Home Energy Rating (HER), contractor bids, and a FHA B Worksheet. This process may become streamlined in 2009 as a result of the Housing and Economic Recovery Act of 2008, which requires HUD to report to congress with ways to remove the administrative barriers and increase consumer participation and awareness of these financing options.
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. Cooperative units are not eligible. Homebuyers should submit applications to their local HUD Field Office through an FHA-approved lending institution, or they can apply directly online at www.fha.com/energy_efficient.cfm. See also www.hud.gov/offices/hsg/sfh/eem/energy-r.cfm.
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.
This mortgage is available to qualified military personnel, reservists and veterans. (See www.homeloans.va.gov/elig2.htm for more details). Applicants should secure a certificate of eligibility from their local lending office and submit it to a VA-approved private lender. If the loan is approved, the VA guarantees the loan when it is closed.
Conventional EEMs
Like Energy Star mortgages, conventional mortgages are not backed by a federal agency. Private lenders sell loans to Fannie Mae and Freddie Mac, which in turn allow homebuyers to borrow up to 15% of an existing home’s appraised value for improvements documented by a HER.
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.
Note:
Note: An allocation of $800 million for new CREBs was made by The Energy Improvement and Extension Act of 2008. The 2008 legislation also extended the deadline for previously reserved allocations until December 31, 2009 and appears to address several weaknesses in the existing law that had previously limited the usefulness of the program for some projects. A separate section of the law expands the list of qualifying facilities for new CREBs to include marine and hydrokinetic power.
It should be noted that the IRS has not yet issued an announcement that they are accepting applications for the new allocation, or any official guidance detailing how it will operate. Until such official guidance is issued, it remains to be seen if the new program will operate exactly as described below.
Clean renewable energy bonds (CREBs) can be used by certain entities -- primarily in the public sector -- to finance renewable energy projects. The list of qualifying technologies is generally the same as that used for the federal renewable energy production tax credit. CREBs may be issued by electric cooperatives, government entities (states, cities, counties, territories, Indian tribal governments, or any political subdivision thereof), and certain lenders. The advantage of CREBs is that they are issued -- theoretically -- with a 0% interest rate.* The borrower pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest.
Participation in the program is limited by the volume of bonds allocated by Congress for the program. Participants must first apply to the Internal Revenue Service (IRS) for a CREBs allocation, and past allocations have also included an expiration date by which the bonds had to be issued. The current allocation is $800 million but there does not appear to be a time frame for issuing the bonds. (See History section for information on previous allocations). Public power providers, governmental bodies, and electric cooperatives are each reserved an equal share (33 1/3 percent) of the most recent allocation. The tax credit rate is set daily by the U.S. Treasury Department. Under past allocations the credit could be taken quarterly on a dollar-for-dollar basis to offset the tax liability of the bondholder. However, under the new allocation the credit has been reduced to 70% of what it would have been otherwise.
CREBs differ from traditional tax-exempt bonds in that the tax credits issued through CREBs are treated as taxable income for the bondholder. The tax credit may be taken each year the bondholder has a tax liability as long as the credit amount does not exceed the limits established by EPAct 2005. CREBs rates are available here.
History
The federal Energy Tax Incentive Act of 2005, under Title XIII of the federal Energy Policy Act of 2005 (EPAct 2005), established Clean Energy Renewable Bonds (CREBs) as a financing mechanism for public sector renewable energy projects. This legislation originally allocated $800 million of tax credit bonds to be issued between January 1, 2006, and December 31, 2007. Following the enactment of the federal Tax Relief and Health Care Act of 2006, the Internal Revenue Service made an additional $400 million in CREBs financing available for 2008 through Notice 2007-26.
In November 2006 the IRS announced that the original $800 million allocation had been reserved for a total of 610 projects. The additional $400 million (plus surrendered volume from the previous allocation) was allocated to 312 projects in February 2008. Of the $1.2 billion total of tax-credit bond volume cap allocated to fund renewable-energy projects, state and local government borrowers were limited to $750 million of the volume cap, with the rest reserved for qualified mutual or cooperative electric companies.
For more information on CREBs, please contact Zoran Stojanovic or Timothy L. Jones of the Office of Associate Chief Counsel of the Internal Revenue Service at 202.622.3980.
*In practice, for a variety of reasons bond issuers typically must issue the bonds at a discount or make supplemental interest payments in order to find a buyer.
Contact: Public Information - IRS Internal Revenue Service 1111 Constitution Avenue, N.W. Washington, DC 20224 Phone: (800) 829-1040 Web site: http://www.irs.gov
Note: This summary should be taken as a preliminary interpretation of how the Qualified Energy Conservation Bond program will operate based on the language of H.R. 1424. The IRS has not yet issued any official program guidance defining its interpretation of the law.
The Energy Improvement and Extension Act of 2008, Section 301, authorized the issuance of qualified energy conservation bonds which can be used by state, local, and tribal governments to finance certain types of energy related projects. Qualified energy conservation bonds are qualified tax credit bonds, and in this respect are similar to existing federal Clean Renewable Energy Bonds (CREBs).
The advantage of these bonds is that they are issued -- theoretically -- with a 0% interest rate. The borrower pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest. The tax credit can be taken quarterly to offset the tax liability of the bondholder. The tax credit rate is set daily by the U.S. Treasury Department; however, energy conservation bondholders will receive only 70% of the full rate set by the Treasury Department. Credits exceeding a bondholder's tax liability may be carried forward to the succeeding tax year, but cannot be refunded. Energy conservation bonds differ from traditional tax-exempt bonds in that the tax credits issued through the program are treated as taxable income for the bondholder.
The definition of qualified energy conservation projects is fairly broad and contains elements relating to energy efficiency capital expenditures in public buildings; renewable energy production; various research and development applications; mass commuting facilities that reduce energy consumption; several types of energy related demonstration projects; and public energy efficiency education campaigns (see H.R. 1424 for additional details). Renewable energy facilities that are eligible for CREBs are also eligible for energy conservation bonds.
The legislation sets a limit of $800 million on the volume of energy conservation tax credit bonds that may be issued by state and local governments. The overall bond volume will be allocated to each state on the basis of its population, and to each large local government (municipality or county with a population of more than 100,000) within a state according to their share of the state's population. Indian tribal governments are treated as large local governments for the purpose of allocating the bonds. Any unused portion of the large local government allocation may be reallocated to other local governments.
For more information on energy conservation bonds, please contact Zoran Stojanovic or Timothy L. Jones of the Office of Associate Chief Counsel of the Internal Revenue Service at 202.622.3980.
Title XVII of the federal Energy Policy Act of 2005 (EPAct 2005) authorized the U.S. Department of Energy (DOE) to issue loan guarantees for projects that “avoid, reduce or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.” The loan guarantee program has over $10 billion in authority to issue loan guarantees for energy efficiency, renewable energy and advanced transmission and distribution projects.
DOE actively promotes projects that fall within three general project categories: (1) manufacturing projects, (2) stand-alone projects, and (3) large-scale integration projects that may combine multiple eligible renewable energy, energy efficiency and transmission technologies in accordance with a staged development scheme. The loans guarantees are intended to encourage early commercial use of new or significantly improved technologies in energy projects. The loan guarantee program is not intended for research and development technologies.
The most recent solicitation for this program was issued on July 11, 2008. The deadline for applications for stand-alone and manufacturing projects, as well as the Part I applications for large-scale integration projects, have been extended from December 31, 2008 to February 26, 2009. All project sponsors who have already filed an application with DOE may append, supplement, or revise their application before February 26, 2009.
Contact: Director DOE Loan Guarantee Program Office 1000 Independence Avenue, SW Washington , DC 20585-0121 Phone: (202) 586-8336 E-Mail: LGProgram@hq.doe.gov Web site:http://www.sba.gov