What is an Energy Mortgage?

The whole concept of Energy Efficiency Financing began when builders started building homes in response to the rising energy costs of the 1970's. Those cutting edge builders who added extra insulation, spent extra effort tightening their homes, upgraded their windows, and/or installed a higher efficiency heating and cooling system were now at a price disadvantage competing with the average builder. The homes looked the same, but the initial cost was now a couple thousand dollars more. Builder's tried long and hard to explain that their homes would be less expensive to own on a monthly basis than the traditionally constructed home, but in most cases the energy upgrades were not recognized in the mortgage loan or credited in the appraisal.

Another problem was that by increasing the first cost of their homes, fewer people could qualify to purchase them. They now had a smaller market to sell to. Lenders only considered principal, interest, taxes and insurance when figuring debt-to-income qualifying ratios. Lower energy bills were not part of the standard equation.

The energy mortgage was born in 1979 when President Jimmy Carter signed an executive order directing federally sponsored secondary market institutions to offer consumers incentives for energy-efficient homes. Freddie Mac responded by expanding the qualifying ratios by what has become known as the "two percent stretch." This "two percent stretch" allows a lender to stretch both the housing debt-to-income ratio and the total debt-to-income ratio by two percentage points. These ratios are typically 28% and 36% respectively. This two percent stretch increases those qualifying ratios to 30% and 38% respectively.