Borrowers with energy-efficient homes less likely to default

Study suggests lenders could lower risk premiums

Borrowers with energy-efficient homes are significantly less likely to default, according to a study by the University of South Carolina Center for Community Capital.

Funded by the Institute for Market Transformation (IMT), the study found that default risks are on average 32 percent lower for borrowers with energy-efficient homes that met "Energy Star" guidelines.

The study examined 71,000 homes and accounted for loan, household and neighborhood characteristics, IMT said in a blog post. Homes earn Energy Star status by meeting guidelines set by the U.S. Environmental Protection Agency. 

IMT said that the results of the study argue that, "the lower risks associated with energy efficiency should be taken into consideration when underwriting mortgages."

A fact sheet on the study adds: "The findings have significant policy implications: Lenders might allow for lower risk premiums that are associated with interest rates, a more flexible credit profile, or a higher debt-to-income ratio for people buying or refinancing efficient homes. This would increase the affordability of energy-efficient homes among many borrowers, especially in high-cost areas."

Ironically, homeowners who have invested in energy-saving upgrades may have trouble getting fair value for their homes if those improvements are not recognized by buyers, appraisers and lenders. More than 200 multiple listing services now include "green fields"  that allow real estate agents to highlight a home’s green features.

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The Appraisal Institute, a group representing real estate appraisers, publishes a "Residential Green and Energy Efficient Addendum," that attaches to the standard Form 1004 used by Fannie Mae, Freddie Mac and FHA.


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