Energy Star Homes America: The Process of Rating

Flow Chart

energy inspection rating performed before, or soon after, offer and acceptance is signed by buyer and seller

energy improvement recommendations are made

bids are obtained for improvements

total of improvement funds added to loan amount

loan is closed and improvement money placed in energy escrow account

improvements are made within 120 days

improvements are inspected by rater for completion

funds are disbursed to contractors

Process to improving your home with ENERGY STAR^® Standards
-Part 2

Introduction to Home Energy Rating Systems

A home energy rating is a uniform method of quantifying or rating the energy performance of buildings. It was developed in response to the need for energy efficiency to be more easily understood and quantified by the various members of the shelter industry.

Energy Ratings Benefit Many People

Consumers can make energy-saving improvements to their homes and be rewarded for these investments through the sale, appraisal and loan process.
Builders can incorporate energy-saving features in the homes they build and use those features to market their homes and distinguish themselves from the rest of the market.
Real estate agents can use ratings to promote homes with energy-saving features.
Appraisers can have a reliable way of establishing the value of energy-saving features in homes they appraise.
Lenders can approve more loans for homebuyers by being able to allow for the reduced operating costs of energy-efficient homes when qualifying homebuyers for loans.

How Energy Ratings Work
A home energy rating provides a way for the energy efficiency of typical single-family houses to be evaluated. It also estimates the annual energy quantity a home will require and the cost of that energy. The rating can be used to compare the energy efficiency of homes in much the same way that the EPA mileage rating is used to compare the fuel efficiency of automobiles.

The rating makes assumptions about the size and lifestyle of the family who will occupy the house. Just as individual drivers determine how much fuel a care will actually use, individual families determine how much energy a house will actually use.

Independent of how a family affects how much energy a house will use, the energy rating can assess the performance of the house itself. This allows consumers to use ratings to make valid comparisons of the energy performance of one house to another.

What the Rater Does
The rater visits the house and completes an extensive inspection of the structure to record its basic type, dimensions, number of stories, types and quantities of insulation, types, sizes, and orientation of windows, air tightness, solar exposure, thermal mass, the efficiency of heating, air conditioning and water heating equipment, and the presence of any other energy-conserving features, such as fluorescent lighting.

Alternatively, if the house has not yet been constructed, the information can be determined from the plans and specifications for the house.

The house description information is then transferred from the site data collection form to the REM/Rate^TM energy analysis and rating software.

How the Rating is Determined
Once the house data has been entered into the rating software, the energy performance of the house is calculated. Points are allocated for energy-saving features. The points are calculated based on a 100-point scale.

Points are given for the energy savings for each feature: envelope efficiency plus solar gain, cooling energy, water heating, and the space heating and cooling system. The total score is then converted into a "star" rating, of which there are five possible ratings:

ONE STAR	*	Below Average
TWO STARS	**	Fair
THREE STARS	***	Good
FOUR STARS	****	Efficient
FIVE STARS	*****	Very Efficient

After determining the efficiency of the house, REM/Rate^TM calculates the approximate annual energy use and energy cost.

The rater can then propose a range of energy improvements and use the software to evaluate their cost-effectiveness and their effect on the rating score of the house.

How Ratings are Used by the Secondary Mortgage Market
Many home loans are sold by the primary lenders to mortgage investors. This secondary mortgage market includes a variety of institutional and private mortgage investment entities which play an increasingly influential role in the home mortgage industry. Lenders sell mortgage loans to obtain capital which is used to fund more new loans, usually retaining the servicing rights to add to their portfolios. Selling mortgages also reduces the lender's exposure to fluctuating interest rates.
B Two leaders of the secondary market are the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") and the Federal National Mortgage Association (FNMA or "Fannie Mae"). Freddie Mac and Fannie Mae set the standards for mortgage investments by issuing loan seller's guides and by providing standard forms used in appraising, processing and underwriting mortgages.

For many years, Freddie Mac and Fannie Mae have recognized the impact of energy costs on home mortgage security. In fact, Freddie Mac's delinquent loan form now includes utility energy costs as one of eight major causes of default.

Both FHLMC and FNMA recognize that the owner of an energy-efficient home will have lower total monthly expenses. Consequently, they have issued guidelines which allow higher qualifying ratios for buyers of energy-efficient homes.

FHLMC's "Sellers' and Servicers' Guide" states that an energy-efficient property may justify higher monthly payment ratios for buyers of energy-efficient homes.

"If the property is energy efficient or contains energy-efficient items...higher income ratios may be appropriate. In its underwriting analysis, the Seller should consider the impact utility charges have on the borrower's ability to meet monthly housing expense and properly maintain the property. An energy-efficient property results in lower utility charges, allowing the owner to apply more income to housing expense. In such instances, higher ratios could be appropriate."

FNMA's "Underwriting Guides: Principal Residences/Second Homes Section 216" also agrees to accept higher payment-to-income ratios.

Lenders should give special underwriting consideration to borrowers who are purchasing properties that are energy efficient or that will be undergoing energy-related improvements. Higher monthly housing expense- and obligations-to-income ratios may be justified because the borrower will realize savings in energy costs.

The lender should consider the energy savings of a property, along with other property and borrower characteristics, when it decides whether increased qualifying ratios are justified. For energy-efficient properties, we allow increases of up to 2% in both the monthly housing expense-to-income ratio and the total obligations-to-income ratio. The property's energy-efficiency must be rated as 'high' to justify the use of these increased ratios."

With both Freddie Mac and Fannie Mae allowing lenders to adjust ratios for energy-efficient homes, lenders are able to qualify more borrowers.

In recognition of the need to develop a consistent way for the mortgage company to identify energy-efficient structures, Freddie Mac and Fannie Mae have approved the use of uniform rating tools such as REM/Rate^TM.