Energy efficiency may soon become a standard element of mortgage eligibility. Today, the debt-to-income ratio used to determine a borrower’s ability to pay includes PITI (principle, interest, taxes, and insurance), plus credit card debt, car loans, and other recurring expenses. Missing from the equation is annual energy-related operating expense, which is on average higher than either property tax or insurance (see chart).

That may change if the Sensible Accounting to Value Energy Act of 2011, or SAVE Act, becomes law. The bill would result in the inclusion of energy and water costs by all federal mortgage agencies when determining ability to pay. Estimated energy expense would be based either on average square-foot costs for the area (taken from the Department of Energy’s Residential Energy Consumption Survey database) or on an optional independent energy audit report, which could also be used by homeowners to support applications to finance energy-efficiency improvements.

In addition to providing a more accurate estimate of repayment risk, the bill would encourage energy improvements to existing homes by including the cost in the mortgage. Eventually, return on investment for energy-related improvements would be reflected in the appraised value of all residential real estate.

The SAVE Act is a long way from becoming law. The Senate bill (S.1737) is currently in committee (no House version has yet been proposed) and no progress is expected in the 2012 election year. But the bill has attracted a broad coalition of support from public and private organizations, including appraisers, as well as bipartisan political support, and it seems likely that some form of the bill will become law in the next few years. 

—Sal Alfano, editorial director, REMODELING.