Guide to Green Mortgages: Requirements, Loan Types & More

Most people who want to "go green" have selfless motives: Cutting back on pollution, saving natural resources and making the world a cleaner, healthier place. But as a homeowner, an energy-efficient dwelling can also make sense for the pocketbook. In fact, an eco-friendly home can be such a great investment that many lenders are getting in on the business by offering "green mortgages." These loans — offered by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and banks — are specifically designed to finance energy-efficient homes. If you shop around for the right mortgage and use the money wisely, you may end up saving a significant amount of money while doing your part to protect the environment.

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There are three basic types of green mortgages: FHA, VA, and conventional.

There are two basic type of mortgages that can help consumers transition to green housing: An energy-efficient mortgage, or EEM, and an energy-improvement mortgage, or EIM.

An energy-efficient mortgage, which is generally rolled into a primary mortgage so there is only one monthly payment, can help you purchase a home you plan to make greener. The lender will take future energy savings into account when determining the size of the loan. In other words, you may be able to get a larger loan — and a more valuable house — than you would with a regular mortgage without requiring a larger down payment.

An energy-improvement mortgage can help you pay for eco-friendly improvements to your existing home, perhaps including new windows, insulation or an upgrade to your heating and cooling system. If you already have a mortgage, the lender can increase the loan amount to cover the costs of your energy upgrade. The lender repays the borrower for expenses from the improvements from an escrow account. This will increase your monthly mortgage payment, but you may save money overall through lower energy bills.

A green mortgage really isn't much different from a regular loan. You'll likely have the same interest rates, and of course, you'll still have to make monthly payments. However, the lender may agree to give you a larger loan to cover the costs of the upgrades. Say, for example, you're looking to get an FHA loan for a $200,000 home. If you took out an EEM to cover an extra $10,000 in improvements, the size of the mortgage, after your down payment, would be about $201,600.

If you bought the house as is with a regular FHA loan, the mortgage would be $192,000. With a 30-year fixed mortgage at an interest rate of 5.5 percent, that would add up to a monthly payment of $1,145 for the EEM and $1,090 for the regular mortgage. That's an extra $55 each month, which should be more than covered by savings from your green improvements.

Qualifying for a green mortgage is essentially the same as qualifying for a regular mortgage. The lender will still evaluate your credit history and your income. The only difference is the extra cost of energy upgrades won't be considered in the qualification process.

Say you're looking at a house that would require a $200,000 mortgage. If you planned to add $10,000 worth of energy improvements through a green mortgage, you would only have to qualify for a $200,000 mortgage, not $210,000.

Lenders treat new energy-efficient homes like any other home. They'll look at your credit history, income, and overall ability to pay without any consideration of the money you'll save on energy bills.

If you're buying an existing home and want to make it greener through an EEM, you'll have to have the home evaluated to get a HERS rating. You'll also have to meet the standard qualifications for the basic mortgage.

There are three ways to end up in a green home. The simplest approach is to buy an existing green house, although it will take some research to know for sure if the house is as efficient as advertised. Or you can have a new house built that fulfills all of your green dreams. For most people, the least expensive way to achieving a green house is to fix, adjust and improve the house they already live in. In all cases, you'll likely need financing to cover the costs.

If you're starting from scratch, you'll want to be energy-conscious from the very beginning.

• Start by finding a local green builder who has partnered with Energy Star. These builders are already well-versed in the latest eco-friendly building techniques.
• Similarly, shop for products with the  Conventional Loans label. This indicates an EPA-certified ability to conserve energy.
• Buy products with the WaterSense label. WaterSense is an EPA partnership program where approved products have been independently certified to save water.
• Consider using highly reflective roof paint or shingles. These options absorb less heat, and can therefore, cut air conditioning costs.
• Recycle leftover scraps of metal and other materials. Recycling options vary from state to state.
• Eliminate ozone depleting substances from the construction process.
• For insulation, use materials with the recommended R-value, or thermal resistance, that corresponds best with your climate and heating system.
• Maximize the use of natural light through windows and skylights.
• Consider home solar panels, especially if you live in a place like the southwest, with a lot of sunlight.
• Consider planting dense evergreens and shrubs. They can naturally create shade in the summer but still allow heat in during the winter.

If you're concerned your home may not be as energy-efficient as it could be, you can get an efficiency audit from an Energy Star certified inspector. Among other things, the inspector will likely conduct a blower door test to check the air-tightness of the house. If the test detects significant air leaks, you can discuss possible solutions with your contractor. You may need new insulation, weather-stripping or duct work. See below for quick ways to green your home.

Here are some simple things you can do to make your more home more energy-efficient and less wasteful:

• Install LED lights, which last longer and waste less energy than incandescent or fluorescent bulbs.
• Use motion sensors to turn lights on and off rather than traditional light switches. This can also save on energy.
• Turn the thermostat down at night and when you leave the house.
• Unplug your computer and appliances when you're not using them.
• Use rechargeable batteries.
• Fix leaks inside and out.
• Wash your clothes in cold water.
• Leave grass clippings on the lawn rather than bagging them.
• Shop for products with the WaterSense and Energy Star label.

Dakota Gale is a mechanical engineer who shifted gears to provide energy-efficient financing services. His company, Green Mortgage Northwest, has helped thousands of buyers in Oregon and Washington with their sustainable financing needs.