HUD Sets New Standards for Energy Efficient Homes Stretch Ratio Policy
By Anna DeSimone
September 30, 2015, HUD issued Mortgagee Letter 2015-22, New Standards for Energy Efficient Homes (EEH) “Stretch Ratio” Policy: Incorporating the Department of Energy’s (DOE) Home Energy Score.
Purpose
This Mortgagee Letter updates the Federal Housing Administration’s (FHA) EEH program, minimum energy efficiency standard, to the most recent International Energy Conservation Code (IECC) adopted by HUD for mortgages on new construction homes and adds the use of the Home Energy Score option for mortgages on existing construction homes. FHA’s EEH program recognizes the savings of energy efficiency in the overall cost of home ownership and allows borrower’s income qualifying ratios to be increased by two percentage points above the standard limits (stretch ratios) for homes that meet the energy efficient standards.
Accordingly, this Mortgagee Letter announces a new partnership between FHA and the DOE that incorporates the use of DOE’s innovative Home Energy Score into FHA’s EEH program.
Background
FHA’s existing EEH policy allows stretch ratios for homes that are built or retrofitted to the 2000 International Energy Conservation Code (IECC). For standard FHA loans, debt-to-income (DTI) ratios are limited to 31 percent (front-end) and 43 percent (back-end). Under FHA policy for the EEH mortgage, these DTI ratios can be increased to 33 percent and 45 percent respectively. To increase opportunities for homeowners to achieve and benefit from an energy efficient home, FHA is adding a new threshold for existing construction homes based on the Home Energy Score scale.
The DOE developed the Home Energy Score as a low cost and reliable method for estimating the energy use of a home and providing a corresponding “score” to rate the relative energy efficiency of the home based on area location. The Home Energy Score uses a systematic approach to provide a reliable and scientifically-based analysis of a home’s energy characteristics and overall energy efficiency.
This calculation methodology takes into account local climate, applies standard assumptions regarding occupant behavior, and provides a consistent, national, standardized approach that allows an “apples-to-apples” comparison of homes. The calculations are based on the Lawrence Berkeley National Laboratory’s DOE-2 model, which provides a detailed, hourly, whole-building energy analysis and is widely recognized as an industry standard.
The Home Energy Score uses a 10-point scale with a “1” applying to homes likely to use a large amount of energy and a “10” corresponding to the most energy efficient homes. An average home in the United States will score a “5” on the scale.
Effective Date
The provisions of this Mortgagee Letter are effective for case numbers assigned on or after January 25, 2016.
EEH Standard on New Construction
For mortgages on new construction homes, borrowers will be eligible for the EEH stretch ratios when their homes meet or exceed the higher of:
- the 2006 IECC,
- any successor energy code standard that has been adopted by HUD for its Minimum Property Standards (MPS), or
- the applicable IECC year used by the state or local building code.
- Homes that currently score a “6” or higher on the Home Energy Score scale; or
- Homes where documented cost-effective energy improvements, as identified in the Home Energy Score Report, would increase a home’s score to a “6” or higher are completed prior to closing, or in association with an FHA program for the escrowing of repairs.
Escrow accounts must be established in accordance with FHA’s repair completion escrow requirements associated with the respective program.
Home Energy Score Report
The Home Energy Score Report includes a detailed analysis of the home’s energy profile including the Home Energy Score, Home Facts, and Recommendations. The Home Energy Score reflects the energy efficiency of a home based on the home’s structure and heating, cooling, and hot water systems. The Home Facts provide details about the current structure and systems, as well as the annual estimated energy use of the home.
Recommendations show how to improve the energy efficiency of the home to achieve a higher score and save money.
Obtaining a Home Energy Score
A Home Energy Score must be completed by a qualified Home Energy Score Assessor (Assessor) using the Home Energy Scoring Tool. To generate an official DOE recognized Home Energy Score, the Assessor must collect and submit a standard set of data inputs regarding the energy related features of a home, including but not limited to its heating, cooling, and hot water systems, as well as its structural envelope, e.g. foundation, insulation, walls, windows and roof. Borrowers and/or Mortgagees are encouraged to locate a Home Energy Score Assessor using a searchable database available at www.homeenergyscore.gov.
Financing Options
Borrowers may purchase or refinance a home utilizing any Title II Single Family forward mortgage program. FHA’s Weatherization program may also be used with these financing options. FHA does not set the fees for the Home Energy Score and they cannot be included in the loan amount to be financed.
To view a list of eligible improvements, and the average cost of each improvement, please refer to the National Residential Efficiency Measures Database located at http://www.nrel.gov/ap/retrofits/group_listing.cfm.
FHA Connection
FHA intends to update FHA Connection to capture Home Energy Score data. Upon completion and announcement, Mortgagees will be required to provide a Home Energy Score in FHA Connection, for all applications utilizing the Home Energy Score report for stretch ratios. FHA will allow and encourages Mortgagees to report Home Energy Score data on all mortgages to allow FHA to analyze the effects of energy efficiency in association with all FHA mortgages.
Required Documentation
The following documents must be included in the case binder submitted for endorsement:
- For loans on existing homes, a copy of the Home Energy Score Report.
- For new construction loans, a copy of the Builder’s Certification, form HUD-92541 to evidence the IECC code, successor code or local/state building code used.
TOTAL Scorecard
TOTAL Scorecard is not presently calibrated to analyze energy efficient cost savings under the current EEH program.
Sample Scenarios
The following scenarios illustrate how an FHA borrower can qualify for EEH stretch ratios using Home Energy Score thresholds:
Scenario 1
In this example, a starting score of 7 (Figure 1) qualifies the borrower for 2% stretch ratios since the home only needs to score a 6 or higher to qualify.
Scenario 2
In this example, documented energy efficiency improvements are made to the home as recommended by the Home Energy Score Report—increasing attic insulation to at least R-30, adding insulation around ducts in unconditioned spaces to at least R-6, professionally sealing the ducts to reduce leakage, replacing the furnace and central air units with ENERGY STAR options, and adding insulating sheathing underneath the siding to R5—to bring the home from a score of 3 to the minimum qualifying score of 6 (Figure 2). By reaching a score of 6, the borrower (either homeowner or buyer) qualifies for the EEH stretch ratios mentioned above.
Please refer to the Mortgagee Letter for additional information.
About the Author
Anna DeSimone is President and Founder of Bankers Advisory and Principal of CliftonLarsonAllen LLP. She can be reached at Anna@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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