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How The National Home Energy Rating System (HERS) And Energy Efficient Mortgage (EEM) Programs Work

How the Home Energy Rating System (HERS) Works. The national Home Energy Ratings System (HERS) method rates a home on a scale of 0 to 100, with 0 being the least energy efficient and 100 being a highly energy efficient house. The system is based on comparing the house being rated to a computer model of that exact same house if it were built to the national Council of American Building Officials - Model Energy Code (CABO MEC) standards for residential construction. This computer modeled house is called the "Reference House." A score of 80 would be a house which meets CABO MEC standards. If the house being rated is less energy efficient than its computer modeled Reference House, then it would score less than 80 points. If the house being rated is more energy efficient than its computer modeled Reference House, then it would score more than 80 points.

For ease of understanding, the scale has been converted to the 
"Star" system as follows:

                                                   The Rated House compared 
HERS Score      Stars                      to the Reference House
__________________________________________________

  0 - 39        One Star                 More than 3 times Less efficient.
  40 - 59      Two Star                 2 to 3 times Less efficient. 
  60 - 79      Three Star               Equal to 2 times Less efficient.
  80 - 85      Four Star                 Equal to 30% More efficient.
  86 - 91      Five Star                 30% to 60% More efficient.
  92-100      Five Star Plus          60% or More energy efficient.

  An EPA Energy Star® Home is a new or energy improved home 
  which scores 86 or higher on the HERS scale.  (Five Star and Five 
  Star Plus Homes)

How Energy Financing Programs Work.

Energy financing is a generic term for either a mortgage or home improvement loan that credits a home's current or added energy efficiency features in the home loan. It can work in one of two ways:

1.) For new and existing homes in which the energy efficiency can be improved, these programs allows for the money saved in monthly energy bills, as documented in a HERS report, to finance the energy improvements. Some programs allow for greater debt-to-income and loan-to value ratio's. (see Example One below)

2.) For an already energy efficient home it could mean allowing the borrower a greater debt-to-income ratio, giving them the ability to buy a higher quality home because of the lower monthly heating and cooling documented in a HERS report. (see Example Two below)

PLEASE NOTE: Energy Efficient Mortgages (EEM’s) are NOT the same as the 203(k) product. EEM’s are Quicker and Easier with more benefits to the Borrower.

 EXAMPLE ONE . . .

A local family is purchasing a 12 year old home for $160,000. Based 
on a HERS report, they have decided to do an EEM and add $4,200 to
theirmortgage to financeheating system and insulation upgrades to 
the home. This is a 30 year, 7% fixed rate mortgage.

                                   EEM with $4,200 in                House with No
                                   Energy Improvements            Improvements    
  -----------------------------------------------------------------------------------
   Monthly Mortgage (PITI)             $1,335                          $1,307
   Monthly Energy Expenses           $124                             $213    
   Total Monthly Cost (PITI +E)        $1,459                         $1,520
   Net Monthly Savings                    $61                              $0
   Net Yearly Savings                       $732                            $0
   HERS Score                                  76.8                              55.7
   Stars                                      Three Stars ***               Two Stars **
____________________________________________________
By adding $4,200 to their mortgage they added $28 to their monthly 
mortgage payment. At the same time, they reduced their average
monthly energy costs by $89, for a net monthly savings of $61 or
$732 per year. As energy prices rise, so will their energy savings.

EXAMPLE TWO . . .

A local family wants to buy or build a new home. Under normal
underwriting guidelines they can generally spend up to 28% of their 
income for their monthly mortgage payment (PITI). The chart below 
gives a very simplified illustration of this family’s additional 
buying power should they purchase a home that meets their EEM 
program’s definition as energy efficient based on a HERS report, 
allowing them a 2% Debt-to-Income Ratio stretch. This example is for
a home purchase with a 7%, 30 year fixed rate mortgage. This also 
assumes the property tax and insurance escrow expense will be
$200 for all incomes. 

   Monthly          Regular            Energy Efficient             Increased 
  Income           Mortgage            Mortgage                Purchasing Power
  -----------------------------------------------------------------------------------
   $2,000            $75,800                  $81,200                     $5,400 
   $2,500            $96,800                $103,800                     $7,000
   $3,000          $117,800                $126,300                     $8,500 
   $3,500          $139,000                $148,700                     $9,700

Some restrictions may apply with various lenders, but generally 
buyers of an energy efficient home, such as an Energy Star 
Labeled home, can greatly increase their purchasing power through
some EEM programs.